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The new Insolvency and Bankruptcy Code (Amendment) Bill, 2021, passed by Rajya Sabha

Legal Correspondent: Mansi Tekam

August 29, 2021: Earlier in April, the President issued the Insolvency and Bankruptcy Code Amendment Ordinance 2021, offering a pre-packed or pre-pack resolution scheme in response to the demands for a more straightforward bankruptcy procedure under IBC to reduce the time and cost for small businesses in trouble. The Ordinance was replaced by the new IBC (Amendment) Bill, 2021 by Rajya Sabha, which introduced an alternate insolvency resolution process for Micro, Small, and Medium Enterprises (MSMEs) called "Pre-packaged Insolvency Resolution Process" (PIRP). This pre-pack framework was recommended by a sub-committee of the Insolvency Law Committee (ILC) in March 2021. The goal was to provide faster, more cost-effective, and value-maximizing solutions for all stakeholders to avoid disruption of the continuity of their businesses and protect jobs. The key provisions to note under the new mechanism are the initiation of PIRP by the distressed Corporate Debtors (CDs) with the permission of two-thirds of their creditors to resolve their outstanding debt. Also, if the operational creditors are not paid 100% of their outstanding debts, the Corporate Debtor can submit a Swiss challenge to the resolution plan under the new mechanism. Therefore, the operational control of business is left with major shareholders of such small enterprises on the commencement of PIRP rather than the creditors under the previous provisions. PIRP resolves a distressed Company's debt through an agreement between secured creditors and investors rather than a public bidding procedure (Swiss challenge).

Swiss challenge is a type of public bidding wherein an interested party bids for a project. Unlike the Corporate Insolvency Resolution Process (CIRP), the debtors or promoters who run the firm remain in control of the enterprise during the PIRP. The proposal also talks about a minimum default amount for initiation of PIRP, i.e. up to 1 lakh rupees. Further, the government is enabled to increase the threshold of default not exceeding Rs 1 crore. The Debtor himself is required to apply for the initiation of the process before the adjudicating authority. In addition, he has to obtain at least 66% of his financial creditor's approval unrelated to the Debtor and provide a base resolution plan before the creditors. The Debtors will be protected against specific actions like filing or continuation of suits, execution of court orders, etc during the PIRP. The proposed amendments also provide for simultaneous disposal of applications for the insolvency resolution process and PIRP. Further, there are provisions for punishment for offences related to the PIRP like fraudulent or malicious initiation of PIRP, defrauding persons etc.


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