PRE-PACK INSOLVENCY IN INDIA: AN OVERVIEW

INTRODUCTION

The Insolvency and Bankruptcy Code (IBC), 2016 was introduced to incorporate various legislation comprising insolvency resolution and realization of assets, which governed the insolvency regime tediously and carelessly. It radically redefined the corporate distress resolution structure of India. The Insolvency and Bankruptcy Code particularly emphasizes augmenting the Corporate Debtor’s asset value, promoting entrepreneurship, and balancing the interests of all stakeholders. 

However, the Credit Insolvency Resolution Process (CIRP) is considered complicated and cumbersome to overcome the reorganization problems of more simplistic corporate structures like the micro, small and medium enterprises. 

To overcome this quandary, the Insolvency and Bankruptcy Board of India introduced the Pre-Packaged Insolvency Resolution Process (PPIRP) mechanism, as an alternative insolvency resolution process.

The Government of India, vide an ordinance dated April 04, 2021, amended the existing Code to incorporate the pre-packaged insolvency resolution process for the MSMEs. The Covid-19 pandemic has created numerous and extreme financial predicaments for the MSME sector, so such an intervention was imperative and inevitable. 

WHAT ARE PRE-PACKS?

A pre-packaged insolvency/bankruptcy, or more commonly referred to as a “pre-pack”, is a pre-planned method of corporate rescue, in which an economically distraught company and its creditors arrive at an understanding with a buyer for its sale before the commencement of liquidation plans.

According to Black’s Law Dictionary, a “pre-pack bankruptcy” occurs whereby the debtor consents to terms reducing the time it takes to handle the business at hand. The idea behind this procedure is to simplify the insolvency process, to decrease the company’s legal and accounting costs, and the amount of time spent in insolvency protection.

Pre-pack focuses to create a balance between guarding the creditors’ interests and maintaining the debtor’s assets and business by encouraging their expeditious transition. A pre-pack is distinguished from the traditional bankruptcy because in a pre-pack the restructuring of the economically distraught company happens before filing for bankruptcy.

Under the pre-pack system, the creditors will consent to terms with a likely investor and seek the consent of the resolution procedure from the National Company Law Tribunal (NCLT/ Tribunal). The approval of at least 66% of financial creditors, independent of the corporate debtor, would be needed before a resolution plan gets presented to the Tribunal. Moreover, the Tribunals have the discretion to accept or decline any request for a pre-pack insolvency procedure before taking into account a request for a CIRP.

APPLICABILITY & PROCEDURE

The Ordinance specifies that an application for Pre-pack can be made under the Prepack Framework only concerning a corporate debtor, which qualifies as a micro, small, or a medium enterprise under Section 7(1) of the Micro, Small and Medium Enterprises Development Act (MSMED), 2006.

The procedure for commencement and termination of Pre-Packaged Insolvency is as follows:

• A corporate debtor may apply to the Tribunal under Section 54C of the Code for commencing pre-packaged insolvency resolution procedure satisfying with other relevant sections of the Code;
• The Tribunal shall, by order, approve/decline the request within 14 days of the reception of the request;
• The PPIRP mechanism shall initiate from the date of approval of the application, and terminate within 120 days of its initiation;
• The resolution professional (“RP”) shall obtain and submit the resolution plan within 90 days from the initiation date;
• The committee of creditors, constituted within 7 days of the commencement date, has to accept the base resolution plan by the proponent of MSMEs. If it gets disapproved, the RP shall ask the potential resolution candidate to contend with the base resolution plan;
• If the committee doesn’t approve any plans, the RP shall file a request with the Tribunal for winding up the pre-packaged insolvency procedure. The jurisdictional Bench of the Tribunal may inter-alia wind up the proceeding and pass a liquidation order.
  

RESTRICTIONS & CONDITIONS

MSMEs can apply for the commencement of the PPIRP mechanism subject to certain restrictions and conditions:

• The Corporate Debtor has not experienced a Pre-Packaged Insolvency during the 3 years before the inception date;
• It is not going through CIRP, and no order of winding up has gotten passed against it;
• The Corporate Debtor or its promoter is qualified to submit a resolution plan under Section 29A of the Code, signifying that Corporate Debtor’s account is not a Non-Performing asset and its promoters are not deliberate offenders and, or, or prohibited on other parameters stipulated in Section 29A;
• The proposition of Pre-Packaged Insolvency gets sanctioned by at least 66% of the financial creditor, independent of the Corporate Debtor.

WHY PPIRP OVER CIRP?

• The most vital trait of the PPIRP mechanism is that it permits the administration of the corporate debtor’s operations to remain to vest in the corporate debtor’s Board of Directors or the partners, as the situation may be, subject to requirements stipulated. On the other hand, in the CIRP, the resolution professional is authorized to administer the affairs with the financial creditors’ supervision. If the creditors want to start liquidation proceedings against MSMEs, they can nevertheless do so, but solely through the CIRP.
• Moreover, PPIRP mechanism plans have to get submitted within 90 days, and the Tribunal has to approve them within another 30 days. Thus, the pre-packaged insolvency resolution proceeding must get finished within 120 from the date the insolvency process initiates. The 2016 Code currently specifies a maximum of 270 days for the conclusion of the whole CIRP. Since the MSMEs have restricted resources to undergo a lengthy and austere liquidation process, the decrease in the time limit for resolution proves to be a boon for bankrupt MSMEs.
• The plan, where only the debtor gets to initiate the liquidation process, is anticipated to generate more expeditious resolution than the existent CIRP and curtail expenses.
• It could also decrease lawsuits, usually started by defaulting promoters to preserve command of their firms, and assist several MSMEs striving to cope with the havoc prompted by the Covid-19 pandemic.
• Furthermore, since this proceeding can be commenced only by the corporate debtor with the approval of 66% of their independent financial creditors, there will be minor incidents of conflicts, which will enable the process to function more efficiently than the standard CIRP.

CONCLUSION

• The PPIP mechanism envisions a debtor in possession and a creditor in the control model, unlike CIRP. This model protects against disruptions in managing the corporate debtor and resultant decline in the value of its assets and goodwill. However, some provisions also restrict the powers of the former management to control the operations of a corporate debtor during pre-pack insolvency resolution proceedings.
• The Union and the Insolvency & Bankruptcy Board of India have been very rapid in coming forth with the pre-pack ordinances. It is a carefully assessed attempt at cushioning the consequences of the devastating changes brought about by the Covid-19 outbreak on the MSMEs.
• Presently, this mechanism is open to MSMEs but may get applied to other sectors gradually. The structure of the pre-pack insolvency process of MSMEs would provide an intriguing preface and a safe trial area for other kinds of debtors, allowing the legislature to put a comprehensive structure for all debtors via the PPIP mechanism for MSMEs.

Author(s) Name: Nancy Goel (Vivekananda Institute of Professional Studies, GGSIPU)

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References:

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