Pre-Packed Insolvency Resolution Process: Relevance and Position in India – By Archit Bhadani

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Pre-Packed Insolvency Resolution Process: Relevance and Position in India

Archit Bhadani
(Pursuing Graduate Insolvency Programme at the Indian Institute of Corporate Affairs)

The recent tough testing times brought certain developed and developing countries, largest economies, corporates on their toes. India too felt the heat of the same and was not spared out of the lot. The Micro, Small and Medium Enterprises which nearly contributes about 27% to the GDP of India had to face the hardest of the times in surviving the same. Resolution of such sector require different treatment, due to the unique nature of their business and simpler corporate structure. Therefore, it is very important for to address the underlying concern for the stress and resolution as they being the backbone of the Indian Economy.

The Micro, Small and Medium Enterprise as per the MSME, Act, 2006 are:

  • Micro Enterprise: Investment in plant and machinery or equipment is not more than Rs. 1cr. And, Turnover not exceeding 5 cr.
  • Small Enterprise: Investment in plant and machinery or equipment is not more than Rs. 10cr. And, Turnover not exceeding 50 cr.
  • Medium Enterprise: Investment in plant and machinery or equipment is not more than Rs. 50cr. And, Turnover not exceeding 250 cr.

There is so recommended a unique framework to provide quick, cost-efficient and least disruptive mechanism which ensures transparency and value-maximization.

The sub-committee constituted under the chairmanship of Dr. M.S. Sahoo, submitted its report recommending the Pre-Packed Insolvency Resolution Process (PPIRP) to be implemented in the India.  PPIRP is built on trust and honours the MSME owners by enabling resolution when the company remains with them.

PPIRP: Relevance in Indian Context

India has been working rigorously and carrying out deep economic reform to make India a great place to do business and has been setting benchmark every since.  The Pre-Packed system with the objective of reducing timelines, being cost efficient and easing out the process of insolvency of stress for the MSMEs, has devised an innovative rescue method that incorporates both formal and informal proceedings. The proceeding under CIPR is a tedious and lengthy process and insofar as the MSMEs are concerned, there is less working capital and operates in a smaller sphere. It empowers the stakeholders to resolve the stress of the corporate debtor with minimum intervention of the State.

PPIRP Framework

The PPIRP in the current scenario is applicable to the corporates which are registered as a MSME. The process of pre-packed resolution can commence only after:

  1. the approval of 66% of the financial creditors in favour for the PPIRP and approval of a name of Resolution Professional;
  2. approval by 75% of the members of the Corporate Debtor;
  3. preparation of a Base Resolution Plan by the Corporate Debtor;
  4. approval of the name of Resolution Professional by the Corporate Debtor and Financial Creditor;
  5. draft Information Memorandum is prepared.

The control and management are vested in the Corporate Debtor following the Debtor-in-possession while creditor-in-control regime. The Resolution Professional duly appointed; however, he does not have the responsibility of running the business of the CD as a going concern and unlike CIRP does not take possession and custody of the assets of the CD. The Resolution Professional has a critical responsibility of oversight of the process, and to ensure fairness and transparency. He provides guidance to the CD in all the tasks prior to initiation and also assists the stakeholders in formulation and approval of the resolution plan.

Prior to the PPIRP was introduced, the MSMEs were at a disadvantageous position as there was usually no one interested in taking over the Corporate Debtor, and it was mostly promoter themselves interested in the resolution, who are barred under the provision of Section 29A. However, the PPIRP under Section 240A exempts promoter or director of the MSMEs from the limitation imposed under Section 29A by vesting the agency with the same of the MSMEs.

Extending the PPIRP Regime to other Corporates

In my opinion, if the corporates other than the MSMEs also stands a chance of availing the provisions of PPIRP, then while still having the Debtor-in-possession with Creditor-in-control model, the time-frame is expected to be reduced to 90 days or less as against 330 days. However, giving the incentives to the promoters to get in to IBC during the early signs of distress of assets will assist in resolving the situation much early.

Section 29A of IBC will apply, however the certain restrictions would not apply, if the Corporate Debtor goes into the process before there is an inability to pay debts.

In the proposed changes discussion paper issued for Public Comments dated: 18th January, 2023 where IBBI has proposed for ‘Expanding the applicability of PPRIP framework’ has mentioned its intention for amending section 54A to provide that the framework shall apply to prescribed categories of Corporate Debtors in addition to the MSMEs as it seeks to provide quicker, cost-effective and value maximization outcome for all the stakeholders in a manner that is least disruptive to the continuity of their business and help in preserving jobs.

Swiss Challenge Method

In a discussion paper by IBBI in August, 2021, Swiss Challenge is a form of public procurement by way of a bidding process, wherein an unsolicited bid is made by the bidder to the auctioneer. Once approved, the auctioneer seeks counter- proposal against the original bidder’s proposal and chooses the best bid amongst all options available including the original bid. In other words, Swiss Challenge Method is a process of bidding or public procurement where a bidder makes a bid on its own. Further, post approval of the same, competing bids are invited. Also, an opportunity is provided by the original bidder to make a competing bid, however the best amongst competing bid is accepted. The ultimate objective of this method under the Corporate Insolvency Resolution Process is the Value Maximization of Assets under stress. The original bis in most of the cases are granted the “Right of first Refusal”.

The IBBI issued a discussion paper on dated 27th August, 2021, on certain issues related to Corporate Insolvency Resolution Process (CIRP). In the report of Sub-Committee of Insolvency Law Committee on Pre-Packed Insolvency Resolution Process, the sub-committee noted that Swiss challenge is time-tested mechanism and has proven to be highly effective in value maximization and ensuring transparency. In Regulation of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process of Corporate Persons) Regulation, 2016 provides for the approval of resolution plan by the Committee of Creditors (CoC). Sub-Regulation 3(a) provides that the CoC shall evaluate the resolution plan received as per the evaluation matrix and thus the said regulation is silent on the exact method to be used for selection of the best resolution plan. Therefore, it is observed that there is no express prohibition on the adoption of Swiss Challenge Method during CIRP. The Swiss Challenge has been used by the CoC in the CIPR of M/S Ruchi Soya Limited, wherein the CoC decided to conduct a Swiss Challenge to maximise the assets value. The provisions regarding the Pre-Packed Insolvency Resolution Process (PPIRP) provides for a hybrid method for value maximization during the resolution process. The process inspired from the Swiss challenge with certain alterations for successful implementation under the PPIRP.

Judicial Insights

Since the advent of Pre-packed Insolvency Resolution Process in the Insolvency and Bankruptcy Code, 2016 since 04th April, 2021, there are four cases which have been admitted under the regime.

In the first case of M/S GCCL Infrastructure & Projects Ltd wherein NCLT, Ahmedabad admitted the PPIRP application under Section 54C of the Code.

In the case of CHD Developers Ltd., wherein an application under Section 54C was made for initiation of PPIRP to the NCLT, Principal Bench where it was contended that an application under Section 7 of the Code by the Home Buyers is already pending and after several hearing, arguments, the order was reserved. Taking note of Section 11A of IBC, which deals with the manner of disposal of application under Section 54C and under Section 7 or 9 or 10 of IBC. The primary issue that arose was whether a pre-packed application can be entertained, when a petition under Section 7 of IBC is pending before Tribunal even before the pre-packed ordinance came into being.

The summary of recommendations was referred and it was recorded in the Insolvency Committee Report that where a corporate debtor is undergoing a CIPR should not be eligible to apply for pre-pack process. Further, if an application for PPIRP and CIRP is pending for the same corporate debtor, then it shall be disposed off in the following manner:

  • Where an application under PPIRP has been filed prior to the CIRP application, then the Adjudicating Authority should first dispose off the application for pre-pack process.
  • Where an application of CIRP has been filed and subsequently the pre-pack application is filed within 14 days of the former, the Adjudicating Authority should first dispose off the application for initiating the pre-pack process.
  • Where an application for CIPR is filed and then the pre-pack application is filed after 14 days. The Adjudicating Authority should first dispose off the application for CIRP.

The NCLT in light of the above provisions held that PPIRP cannot be entertained in view of the pending Section 7 petition under IBC. Further, the Corporate Debtor also has already given consent for admission of CIRP, and the CD has conceded to debts and default both in terms of operational creditors and real estate allottees, no further enquiry on debt and default is required.

The recent case of Amrit India Ltd. was also admitted by the NCLT under Section 54C giving necessary directions to the appointed Resolution Professional for resolution.

Increasing the ambit of PPIRP in India

  • There should be created a level playing field as the operational creditors may have to take haircuts in same footing as the financial creditors.
  • The PPRIP should be marketed and the ecosystem of IBC should be made well versed with the nuances of pre-packaged insolvency process.
  • The same should be extended to other corporates having less complex business transactions and should not just be limited to the MSMEs.
  • Guideline, policies, regulations and framework should be introduced with regards to the Financial Institutions.
  • Forensic Audit should be made mandatory prior to filing application before the NCLT by the banks to ensure that the Corporate Debtor is not subject to any avoidance transaction as laid down in the Code.

Conclusion

Pre-packed Insolvency Resolution Process is a hybrid process comprising both of formal (judicial) and informal (out-of-court) proceedings which aims at providing a time-bound resolution to the MSMEs eliminating the difficulties arising in the CIRP keeping in mind the scale of operations and the contribution in the Indian Economy. The inclusion of the hybrid process where the pre-initiation phase of PPIRP is informal while the post-initiation phase if formal. The benefit that the MSMEs enjoys in the Pre-Packaged Process is that it restores the enterprise, revive their business operations as a going concern.

Where the PPIRP is proposed to be extended to other corporates, which will provide quicker, cost-effective and value maximization outcome for all the stakeholders with least disruption in the operations, will result in shortening the timelines as compared to 330 days in case of CIRP will overall help in preserving the value and maximization the same.

 

Reference

  1. Insolvency and Bankruptcy Code, 2016
  2. ibbi.gov.in
  3. mca.gov.in

 

 

Disclaimer: The Opinions expressed in this article are that of the author(s). The facts and opinions expressed here do not reflect the views of IBC Laws (http://www.ibclaw.in). The entire contents of this document have been prepared on the basis of the information existing at the time of the preparation. The author(s) and IBC Laws (http://www.ibclaw.in) do not take responsibility of the same. Postings on this blog are for informational purposes only. Nothing herein shall be deemed or construed to constitute legal or investment advice. Discussions on, or arising out of this, blog between contributors and other persons shall not create any attorney-client relationship.

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