The Government of India by way of an ordinance on April 4 2021 amended the Insolvency and Bankruptcy Code 2016 (Code) and has introduced the concept of Pre-Packaged Insolvency Process (PPIP) and the mode and manner to initiate the same.
At present the concept PPIP introduced will only be applicable in case of Micro, Small and Medium Enterprises (MSME). As stated in the objective of the ordinance, the PPIP for MSME have been introduced to provide them an efficient alternative insolvency resolution process so that value maximization, which is the main objective of the Code is achieved quicker and, in a cost- effective manner with least disruption to the business.
The Code emphasizes on reorganization and insolvency resolution of the Corporate Debtor (CD), while maximizing the value of assets of the CD and promoting entrepreneurship, availability of credit and balancing the interests of all stakeholders. However, due to the simpler corporate structure of the MSME, the process of Corporate Insolvency Resolution Process (CIRP) for reorganization is considered a cumbersome process and by the time the process is concluded there are many things which might have been lost due to disruption in business.
We all are aware that in CIRP the promoters/management have very less say as the CD is managed by Resolution Professional (RP) and RP at times due to lack of experience in that particular industry cannot take prompt decisions or even if able to, would not like to take the same unless consent is taken from Committee of Creditors (CoC) to avoid any unwanted consequences/allegations for which he might be made responsible. Even though in CIRP the CD needs to be a going concern so that it can fetch a good resolution plan, but in most of the cases (except big CD) of CIRP no new business operations are undertaken. The object of revival may not be achieved in case of MSME if the concept of both the control and possession with Creditors is implemented.
In order to overcome the difficulties of CIRP in case of simpler structures like MSME, the PPIP mechanism has been introduced which will function as a hybrid framework blending both formal and informal processes within the basic mechanism of the I&B Code wherein the CD in default with approval from not less than sixty six percent (66%) Financial Creditors (other than related party) will proceed with filing an application before the Adjudicating Authority (National Company Law Tribunal, NCLT) for initiation of the Pre Packaged Insolvency when the internal mandate from the directors and shareholders have been taken.
Once the application is admitted by NCLT, the CD will itself first provide a Base Resolution Plan and CoC can provide an option to the CD to improve the same or CoC can request the RP to invite resolution plan in case the Base Plan proposed by CD is not approved by them or if the Base Plan so proposed impairs any claims owed by the CD to the Operational Creditors (OC). The Resolution Plan which is best viable in the opinion of CoC will be approved by not less than sixty six percent (66%) of CoC voting shares and will be submitted to NCLT for approval by RP. The timelines to complete the PPIP is One Hundred and Twenty Days (120 days).
The PPIP provides that where CoC after considering the feasibility and viability of Resolution Plan submitted by CD accepts the same and such Resolution Plan provides for impairment of any claims owed by the CD, the CoC in such case may require the promoters of the CD to dilute their shareholding or voting or control rights in the CD. If no such dilution is proposed, then CoC will be required to record the reasons before approving such Resolution Plan. This recording of reasons has been made mandatory for the reason that it has been seen that during CIRP the Resolution Plans approved by CoC, have given less emphasis on the realization to be made to Operational Creditors.
Under the introduced PPIP there is a clear demarcation of the responsibilities of CD, RP and CoC. Even though the management remains with the CD, still the RP has been given the responsibility to monitor management of the affairs of the CD and if there is any breach of any of the obligations of the Board of Directors of CD, RP has to inform the CoC regarding the same. The RP under PPIP more or less is bestowed with the same duties, responsibilities, and powers as bestowed on a RP appointed during CIRP. The CoC by a vote of not less than sixty-six percent (66%) of the voting shares may resolve to vest the management of the CD with the RP however for the same the RP will be required to make an application to the NCLT.
Though the amendments clarify many things, in certain aspects the clarity is still missing. For example:
- What are the clear instances when the CoC can proceed with deciding that the management be vested with RP during PPIP and not with Management even though the main attraction of PPIP is that the management will remain with CD.
- The CoC is also empowered that any time after the PPIP commencement date, but before the approval of resolution plan by a vote of sixty-six percent (66%) of the voting shares, may resolve to initiate CIRP in respect of CD if such CD is eligible for CIRP under Chapter II of the Code and the RP will file the application for such intimation of the decision of CoC to NCLT. Here, the NCLT has not been given any authority to look into the merits of such decision of CoC as the relevant section inserted under the Code i.e. Section 54-O(2)(2) provides that on filing of such application the NCLT shall pass an order to terminate the pre-packaged insolvency resolution process and initiate CIRP. The amendment is silent w.r.t grounds on which the CoC can decide for initiation of CIRP and terminating pre-packaged resolution process. It would still be appreciated in case there is no resolution plan is received and the Base Resolution submitted by CD is not viable that CoC can give further life to the CD instead of letting it go to liquidation as failure of PPIP means liquidation. This unclarity may lead to litigation(s) initiated by CD (Promoters) as well as Resolution Applicant. Furthermore, the date of CIRP will be the date on which the NCLT has passed the order of termination of PPIP and said CIRP will be considered to be initiated under Section 7 of the Code. However, for the purpose of Section 43 (Preferential transactions), Section 46 (Relevant period for avoidable transaction) and Section 50 (Extortionate Credit Transactions) of the Code, the date of initiation PPIP will be considered which means the ambit of investigation period will be enlarged.
- Unlike CIRP where the withdrawal under Section 12A of the Code is permissible in case of PPIP once initiated it cannot be withdrawn or atleast clarity on this aspect is missing as no amendment has been made in Section 12A to give effect of PPIP introduced.
As in case when the Code was introduced it took time to settle before it is used cautiously by the Creditors especially operational creditors. It will take time before PPIP is fully evolved with the help of clarifications, judicial interpretations and for the MSME community to actually consider moving under PPIP, instead of seeking restructuring under RBI prudential norms if the default is related to financial debt or other alternative mechanism or the lenders agreeing to PPIP. Till such time the MSME units will be required to look into the pros and cons before moving under Pre-Package Insolvency Process.
(The writer is Senior Partner, Singh & Associates)