Background
The corporate world comprises multitudinous business associations with varying organizational structures, often subjected to numerous processes of restructuring and reorganization. Since no two organizations are identical, the method of corporate rescue opted for by different organizations naturally varies. It is only reasonable for a company to opt for a restructuring mechanism that is most suitable and apt for the debt resolution of that company.
In the Indian context, the Insolvency and Bankruptcy Code, 2016 (Code) was a beam of hope that endeavoured to tackle the menace of bad loans and bankruptcy that beleaguered the corporate industry. The Code envisaged the Corporate Insolvency Resolution Process (CIRP) for debt resolution of all body corporates. The CIRP despite its shortcomings continued to be the conventional method of debt resolution.
However, in the wake of COVID-19, the Insolvency Law Committee (ILC) felt a dire need to introduce a framework for Pre-Packaged Insolvency in India. To cater to the needs of the industry worst hit by the pandemic and to make debt resolution smoother and more efficient, the ILC chalked out the Pre-Packaged Insolvency Resolution Process (PPIRP) for corporate persons classified as micro, small and medium enterprises (MSMEs) in India. Against this backdrop, the article aims to give a bird’s eye view to analyse the success of PPIRP in India.
PPIRP – The Concept and Process
Pre-Packaged Insolvency Resolution Process or a Pre-Pack is essentially a hybrid mechanism, enabling a model of reorganization whereby the creditors and debtors together participate in an informal arrangement of resolution prior to approaching the Adjudicating Authority (AA). According to Black’s Law Dictionary, it is Bankruptcy where the debtor agrees to terms reducing the time it takes to handle the business at hand. The process simply envisages a resolution by way of an advance (out-of-court) agreement between the creditors and debtors of a financially distressed company instead of initiating CIRP against the company.
In India, PPIRP applies to MSMEs who have a default of not more than a crore and an application for PPIRP can only be filed by a Corporate Debtor (CD) of a financially distressed company. The process of resolution begins when at least 66% of the financial creditors have approved the PPIRP proposal along with the name of the resolution professional after which a base resolution plan is presented by the CD. Once the base plan is approved, PPIRP commences as soon as the AA admits the PPIRP application [T]. Upon admittance of the application, the Committee of Creditors (CoC) gets constituted within a span of seven days [T+7]. The CD then presents the base resolution plan to the CoC which either approves or disapproves the plan within a span of ninety days [T+90]. If the plan is approved by the CoC, the plan is submitted to the AA which may further approve or disapprove the same within a span of thirty days [T+120]. The approval of the plan marks the success of the PPIRP whereas disapproval of the same means the contrary.
PPIRP in India
The concept of PPIRP is well-accepted in the West because of its inherent features of being a speedy and flexible form of debt resolution. However, in India, the need for introducing provisions of PPIRP (contained in Chapter III-A of the Code) was felt majorly in the case of small businesses that underwent financial distress during the pandemic.
Through these provisions, the ILC not only aimed to provide an alternative and efficient remedy to small businesses that foresaw corporate death but also preserve jobs, lessen the burden on the Company Courts and introduce a blend of ‘debtor-in-possession’ and ‘creditor in control’ model for making PPIRP more profitable and transparent.
PPIRP – The Progress
Since the issuance of the Ordinance dated 4th April 2021, which introduced the revolutionary PPIRP regime, there have been only two pre-pack cases that the country has witnessed – The cases of Loon Land Developers (Delhi) and GCCL Infra-structure & Projects (Ahmedabad).
No one can refute the fact that businesses had been failing then and are failing now also. The question is whether the creditors and debtors are in dilemma or are at loggerheads with this new regime.
While the Code itself is under scrutiny and is being viewed by the public through a controversial lens, the PPIRP scheme has been a prominent blotch for some time now. Industry scholars have constantly stressed the need for a comprehensive framework of bankruptcy laws, still, the ILC impetuously implemented this scheme against the backdrop of poor legal infrastructure. On the PPIRP scheme – “I still find that the wings that are so necessary for the bird to fly are still not there. The scheme has still not taken off (at the desired manner)” said Nirmala Sitharaman (Finance Minister, India).
Further, the creditors lack confidence and faith in the pre-pack process due to its unfathomable aspects. The debtor-in-possession (DIP) model enables only a CD to initiate PPIRP and gives the existing management the ability to utilize company assets as per their will and knowledge to keep the company afloat. Additionally, a major chunk of PPIRP takes place informally which increases the probability of collusion and makes transparency a big issue during the process. Lastly, the prospect of investigation on voluntary haircuts by creditors and an unrealistic timeline prescribed for PPIRP undoubtedly add to the pile of concerns of the stakeholders.
The effect of PPIRP has been quite contrary to the intention and expectations of the legislators.
It is true that the PPIRP scheme is not as exhaustive as CIRP. For an instance, it fails to acknowledge the likelihood of misappropriation of company assets, fraudulent activities, and so on prior to approaching the AA. This fundamentally cripples the object of the Code and is detrimental to the interest of the stakeholders whose only recourse is to approach the Court thereby adding a burden on the judiciary. Thus, the pre-pack process envisioned to reduce the burden on Courts has the potential to boomerang and become the ultimate cause of incremental litigation.
Conclusion
The Pre-Packaged Insolvency regime has evolved with time and has been a considerable success in the West. In India, a thorough PPIRP scheme will be highly beneficial to the MSMEs considering the sector contributes about 29% to the country’s GDP and is crucial to the functioning of the economy, including in terms of employment generation, exports, and lending opportunities. However, due to legal inadequacies and flaws in the existing regime, the country is facing a dearth of cases under this scheme.
The government intends to popularise the scheme by raising awareness and reviewing the existing framework to best suit the needs of all. It is speculated that the review would translate into giving better protection to the financial creditors and providing an elongated timeline for resolution under the pre-pack scheme.
Though the scheme was implemented for MSMEs (for their unique nature of business), there is no reason to not extend the benefits of the scheme to all the other body corporates. It is pertinent to note that, amidst the storm of controversial judgments like Vidharba, Rainbow, and Resurgence, even the Insolvency practitioners emphasize the need to extend the pre-pack scheme to all the corporates for a higher rate of recovery.
To actualize the benefits of a pre-pack, it would be necessary to have a holistic approach to drafting a comprehensive pre-pack code. Doing so would inevitably reduce the burden on Courts and Tribunals, leading to profitable debt recovery. A comprehensive code would make debt resolution flexible, cost-effective, and most importantly less time-consuming for both the creditors and debtors. The key elements to making this process a success would include minimal judicial intervention, a balance of control between the creditors and debtor, and a well-defined role of the resolution professional, which are presently lacking in the scheme.
(This article is authored by Ms. Aasthita Dutta Majumder, currently a 4th year – B.L.S. LL.B, student at University of Mumbai. The author can be contacted at: aasthitadm@gmail.com)
NUALS Restructuring and Insolvency Law Journal 