The Hon’ble President of India promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 on the 4th of April 2021 (“Ordinance”) to introduce the much-awaited Pre-Packaged Insolvency Resolution Process (“PPIRP”) under the newly inserted Chapter-IIIA of the Insolvency and Bankruptcy Code, 2016 (“IBC”) primarily to allay the concerns of small entrepreneurs whose businesses have been ravaged by the Covid-19 pandemic induced disruptions across the nation. The notification, rules, and regulations for proper and smooth functioning of the PPIRP have also been introduced immediately after the passing of the ordinance.
The basic intent behind introduction of PPIRP is to save the time taken in the whole resolution process and consensual restructuring. Pertinently, the PPIRP is only for the Micro, Small and Medium Enterprises (“MSMEs”) whose default is not more than INR 1 crore. Law(s) regulating the MSMEs states that the capital investment in the Micro Enterprises shall not be more than 1 crore and the turnover shall not be more than 5 crores, for Small Enterprises, the capital investment shall not be more than 10 crores and turnover shall not be more than 50 crores and for Medium Enterprises, the capital investment shall not be more than 50 crores and the turnover shall be less than or equal to 250 crores.
On a bare perusal of the Ordinance, it can be deduced that the PPIRP is a sequel to Section 10A of the IBC which suspended the operation of Section 7, 9 and 10 of the IBC for the debts accrued between the period of March 25, 2020, to March 25, 2021.
Meaning of Pre-Packaged Insolvency Resolution Process
The concept of PPIRP has been introduced to insulate the MSMEs as well as the creditors from prolonged legal battles at a time when financial liquidity in the market is essential to bring back the crippled economy on its feet. Although prevalent in various countries, introduction of this unique method in India allows the creditors as well as the debtors to work out a robust plan and iron the differences without going through the rigours of litigation proceedings. PPIRP promotes mutual negotiations as regards the terms and conditions of restructuring with minimum involvement of the Adjudicating Authority (“AA”). Contrary to the formal insolvency proceedings such as the corporate insolvency resolution process (“CIRP”) which is time-consuming, PPIRP entails informal resolution(s) passed outside the court which is capable of obtaining legal sanctity if found appropriate by the AA. In short, PPIRP is a pre-out of court-settlement which can be recognised by the court with apposite safeguards for all the interested parties.
Promoters are allowed to participate, board of directors exercise power and the corporate debtor presents the base resolution package, which is subsequently put to bidding process using the Swiss challenge. This way, PPIRP aids the corporate debtor in reaching an agreement with the creditors.
The pre-pack mechanism allows for a Swiss challenge for any resolution plans which proved less than full recovery of dues for operational creditors. Under the Swiss challenge mechanism, any third party would be permitted to submit a resolution plan for the distressed company and the original applicant would have to either match the improved resolution plan or they can lose their company.
Pre-requisites of PPIRP in India
Subject to the following conditions, any corporate debtor can initiate the PPIRP:
- The PPIRP must be approved by at least 3/4th of the total number of partners of the corporate debtor.
- Corporate debtor must have not undergone a PPIRP or a CIRP in the preceding three years;
- Corporate debtor must not be undergoing a CIRP process;
- No order of liquidation under Section 33 of IBC must have been passed against the corporate debtor;
- Subject to the conditions laid down under section 240A of the IBC, a corporate debtor must be eligible to submit a resolution plan under Section 29A of IBC;
- The details of the respective creditors along with the resolution plan must be submitted with the resolution professional by the corporate debtor strictly two days before the start of PPIRP;
- Financial creditors must not be the related parties of corporate debtor and, the proposal of the Insolvency Professional must be approved by at least 66% of the financial creditors;
Commencement of PPIRP
Once the conditions under section 54A have been met, the corporate debtor can initiate the PPIRP. Thereafter, the AA shall either accept or reject the application of PPIRP within a period of 14 days. Upon admission, a moratorium will be declared by the AA within the meaning of Section 14 of IBC and a public announcement will be made.
Duration of PPIRP
The entire PPIRP must be concluded within a period of 120 days, out of which, 90 days are granted to the committee of creditors (CoC) for working out and approval of PPIRP plan and the remaining 30 days are granted for seeking approval from the AA. The AA may approve or reject the PPIRP plan under subsection (4) or (12) of Section 54K of IBC in case it does not result in change of management or the control of the corporate debtor.
Role of the Resolution Professional in the PPIRP
At the outset, the Resolution Professional (“RP”) is required to ascertain whether the corporate debtor meets the requirements given under section 54A of IBC. Thereafter, during the PPIRP, the RP is required to confirm whether the list of claims of corporate debtor are in conformity with section 54G of IBC. The RP is required to oversee the entire process and ensure no malpractices from the start till end of PPIRP. Furthermore, when the resolution plan is not approved by the CoC, the RP shall invite third parties to submit a resolution plan to compete with the base resolution plan.
Role of Committee of Creditors
The CoC must be constituted within 7 days of the commencement of PPIRP by the resolution professional. The CoC may approve the resolution plan or grant an opportunity to the corporate debtor to revise the resolution plan. The assent of at least 66% of the creditors constituting the CoC is imperative for a resolution plan to succeed. In a nutshell, it is the CoC which exercise and wields the real authority in PPIRP.
Management during PPIRP
The operations of the company continues to be managed by the directors, promoters amongst others during the PPIRP.
Completion of PPIRP
The PPIRP can conclude in four possible ways:
- The PPIRP approved by the CoC is allowed by the AA;
- The PPIRP is terminated by AA, either at the request of CoC or on its own due to contravention of any applicable provision;
- The AA orders commencement of CIRP at the request of the CoC;
- The AA passes an order of liquidation, if subsequent to an order vesting the management of the corporate debtor with the IRP, the CoC approves a resolution plan that does not envisage a change in control or management to a third-party or the PPIRP is required to be terminated.
PPIRP vis-à-vis CIRP – Order of priority
Section 11A lays down the order of priority for disposal of application filed under Section 54C of the IBC for initiation of PPIRP vis-à-vis an application filed under Section 7 or Section 9 or Section 10 for initiation of CIRP:
- Where an application filed under Section 54C of the IBC for PPIRP is pending, the AA shall pass an order to admit or reject such application before considering application under Section 7 or 9 or 10 of the IBC for CIRP, in respect of the same Corporate Debtor;
- Where an application under Section 54C of the IBC for PPIRP is filed within 14 days of any application filed under Section 7 or 9 or 10 of the IBC for CIRP, the AA shall first dispose of the application under Section 54C;
- Where an application under Section 54C of the IBC for PPIRP is filed after 14 days of any application filed under Section 7 or 9 or 10 of the IBC for CIRP, the AA shall first dispose of the application under Section 7, 9 or 10.
However, Section 11A does not apply to the applications filed under Section 7, 9 and 10 of the IBC that are pending as on the date of the commencement of the Ordinance.
A comprehensive and robust framework for PPIRP was long required in India. PPIRP provides flexibility to the corporate debtor and its creditors to arrive at a mutually agreed mechanism for resolution of the debt. Upon a mutual agreement, legal sanctity thereto is granted by the AA. Moreover, the PPIRP lays down the unique approach of ‘debtor in possession and a creditor in control model’ which protects the corporate debtor from deterioration in the value of assets and goodwill. PPIRP will further assist the MSMEs to manage the Covid-19 pandemic induced financial stress by reducing litigation. PPIRP is nothing but another arm of Alternative Dispute Resolution mechanism wherein the parties can work out a plan informally and obtain a ratification thereto by the AA.
This is a much-needed respite for the MSMEs as the existing schemes including the CIRP presented liquidation as consequence of failure.
However, there are various shortcomings in the law that need to be addressed by the government:
- PPIRP favours secured creditors over operational creditors as the operational creditors does not have much say in the negotiation nor they are given a fair share.
- Another hurdle is the lack of transparency in the whole PPIRP. It is noteworthy that the existing management would be in-charge of the assets to keep the company afloat and hence, the legitimacy of the entire process will be questionable.
- There will always be chances of collusion/mismanagement as the PPIRP is initiated by the corporate debtor itself and therefore, the aspect of mismanagement cannot be ignored.
Lastly, the GoI seems to be testing the pre-pack scheme by restricting its scope to MSMEs only and hopefully, a holistic pre-pack scheme encompassing all sorts of businesses irrespective of size or worth will enter the realm of insolvency law in India soon.
Author: Gurmukh Choudhri, Associate
Gurmukh is a counsel at TMT Law Practice, New Delhi. A dispute resolution lawyer, Gurmukh’s core areas of practice includes intellectual property laws, arbitration laws, insolvency laws, civil and criminal laws. Gurmukh regularly advises clients on media and broadcasting rights and telecommunications laws.