In January 2021, a sub-committee of the Insolvency Law Committee published its recommendations on a framework for the pre-packaged insolvency resolution process in India (PPIRP). Following these recommendations, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 came into force on 4 April 2021 and was recently confirmed by Parliament by way of the Insolvency and Bankruptcy Code (Amendment) Act, 2021 (the Act).
A pre-pack framework typically comprises a plan established between a debtor and creditors prior to the initiation of a formal corporate insolvency process, which is granted approval on an expedited basis once the formal process starts. Due to their flexibility and efficiency, pre-packs are becoming increasingly popular internationally. This Act introduces the PPIRP to allow for a quicker, more cost-effective and value-maximising insolvency resolution of micro, small and medium enterprises (MSMEs) in India.
The Act has confirmed the introduction of the PPIRP under a new chapter to the Insolvency and Bankruptcy Code of India, 2016 (the Code). Considering the unique position of the MSMEs in India and their significant contribution to the Indian economy, the Act is a measure that would support the sector in the aftermath of the covid-19 pandemic. In addition to ensuring quicker and more cost-effective insolvency resolutions of MSMEs, the process aims to cause little disruption to the continuity of businesses, which in turn preserves jobs.
Under this new regime, corporate debtors that have committed default of at least 10 lakh (£9,800) are eligible for the PPIRP and may negotiate a “base plan” with their creditors. Once 75% of their members and 66% of their unrelated financial creditors approve the proposal to initiate the PPIRP, the corporate debtors may approach the National Company Law Tribunal (NCLT) to initiate the process. It is important to note, however, that the ineligibilities prescribed under section 29A (except the ones regarding non-performing assets and default on guarantees) continue to be applicable to the PPIRP, and corporate debtors that would be disqualified under section 29A are not permitted to initiate a PPIRP. Once a PPIRP has been initiated, a limited moratorium is declared and a resolution professional oversees the process.
During a PPIRP, the corporate debtor’s management continues to stay in possession of the company, albeit with the oversight of the Committee of Creditors (CoC). The CoC itself is formed based on a list of claims provided to the resolution professional by the corporate debtor. Additionally, the corporate debtor must provide the resolution professional with a preliminary information memorandum containing all information relevant for formulating a resolution plan, as well as the negotiated base plan. The CoC retains the decision to approve the base plan, or to invite other plans to challenge it. Any plan that receives no less than 66% approval from the CoC is considered approved and is submitted to the NCLT. A PPIRP must be concluded within 120 days of commencement.
At any point during the PPIRP, the CoC may vote to apply to the NCLT to transfer the management of the corporate debtor to the resolution professional. The NCLT in such a case would assess whether there has been fraud or gross mismanagement of the affairs of the corporate debtor, in which case, it would pass order vesting the management of the corporate debtor with the resolution professional. The CoC may also choose to terminate the PPIRP or convert it into a Corporate Insolvency Resolution Process (CIRP) at any time during the process. If the PPIRP does not conclude within the prescribed timeline, or if the CoC does not approve any plan, the resolution professional may file an application before the NCLT for termination of the PPIRP. The PPIRP would not ordinarily result in liquidation of the corporate debtor, but this may be the case in certain circumstances where the management is recalcitrant, or an approved resolution plan is contravened.
The PPIRP provides a new framework for the insolvency resolution of MSMEs that would not otherwise be able to afford the time consuming and expensive process under the Code. The 120-day timeline is less than half of the time that is ordinarily taken under a CIRP. Moreover, the PPIRP process may be less expensive in the long run as it will allow debtors to negotiate a base plan with creditors prior to commencing the formal process while receiving final approval on the plan by the NCLT. Finally, since the management of the corporate debtor remains in possession of the company, there is lesser value destruction and the goodwill of the small business may be retained. Moreover, since the debtor retains control over the business, they may have more scope and authority to negotiate a base plan that may be viable for the business.
While the introduction of the PPIRP is welcome, the government may consider taking further steps to strengthen some features of the proposed PPIRP.
First, one of the main shortcomings of the CIRP under the Code has been the heavy reliance on the NCLT. This has led to overburdened tribunals, elongated litigation and increased costs for the stakeholders. In the proposed PPIRP framework, the involvement of the NCLT remains largely unchanged. The process cannot be initiated, and a plan is not made binding, without an approval from the NCLT. There are no guidelines that inform or limit the rights of the stakeholders to approach the NCLT. For instance, while the CoC is permitted to vote to transfer the management of the corporate debtor from the debtor to the resolution professional, the NCLT has to determine the existence of fraud or gross mismanagement in order to permit such a transfer.
This would inevitably lead to time-consuming litigation, undermining the objective of the PPIRP. Therefore, it would be helpful to legislatively reduce judicial intervention unless it is necessary under the framework. For example, an out-of-court admission process could be introduced, where the NCLT is merely informed when a PPIRP begins. The NCLT would only be required to intervene where a certain percentage of creditors oppose the initiation of the PPIRP.
Second, the PPIRP has been introduced as a measure strictly for MSMEs, and not as an alternative to the CIRP for all corporate debtors, which is the case in most jurisdictions around the world. While it is undeniable that MSMEs hold a crucial place in the Indian economy and will benefit from this framework, it may be beneficial to soon provide the PPIRP as an alternative mechanism for all corporate debtors.
If these main concerns are addressed, the PPIRP may evolve to become a viable mechanism of rescue for all distressed companies in India.
This article was originally published in Lexology on 1 October 2021 Co-written by: Misha, Partner; Shreya Prakash, Associate. Click here for original article
Contributed by: Misha, Partner; Shreya Prakash, Associate
This is intended for general information purposes only. The views and opinions expressed in this article are those of the author/authors and does not necessarily reflect the views of the firm.
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