Insolvency Resolution Process is a recovery mechanism for the creditors who have advanced their money to different entities or people. It acts as a pathway towards settlement regarding the transactions related to lending - borrowing purposes between the corporate persons and the financial providers. In India, when a needed criterion of "default" is met, the settlement process normally begins with the admission of an application from an entitled stakeholder. The Insolvency and Bankruptcy Code, 2016 [“Code”] provides for a peaceful period during which parties may strive to resolve the corporate stress without fear of recovery or enforcement actions. In the case of corporate insolvency, creditors assess the viability of the corporate debtor ["CD"] and try to revive it through a resolution plan. An optimal resolution plan helps both debtors and creditors to maximise the value of the insolvent company's assets. However, in some scenarios, reaching such resolutions can be difficult owing to the competing goals of both parties.
There are two broad processes for the resolution of "corporate stress or debt": (a) Corporate Insolvency Resolution Process (CIRP) resolves the stress either through a resolution plan rehabilitating the CD or liquidation of the CD; and (b) Pre-Packaged Insolvency Resolution Process (PPIRP) either resolves stress through a resolution plan or closes in case there is no resolution plan[1]. Out of the two, this article primarily focuses on the PPIRP as the method of resolution before the Adjudicating Authority. The purpose of this article is to assess the feasibility of bringing PPIRP to India after weighing the benefits and drawbacks.
BACKGROUND:
Micro, small, and medium enterprises ("MSMEs") are critical for India’s economy. They contribute significantly to GDP and provide employment to a sizeable population. The COVID-19 pandemic has effected their business operations and exposed many of them to financial stress. Resolution of their stress needs different mechanisem, due to the unique nature of their businesses and non-complex corporate structures. Therefore, need was felt to provide an efficient alternative insolvency resolution process under the Code for corporate MSMEs, which can ensure quicker, cost-effective and value maximising outcomes for all the stakeholders, in a manner which is least disruptive to the continuity of their businesses, and which preserves jobs.
PPIRP was added to the Code as a new form of redressal mechanism for the MSMEs vide the Insolvency and Bankruptcy Code (Amendment) Bill, 2021. It was introduced by the government to ensure that PPIRP is a cost-effective and value-maximizing resolution mechanism that protects jobs and ensures business continuity and ownership, with the least amount of disturbance to business operations. The Amendment has created Chapter III-A in Part-II, which adds Sections 54A to 54P to the code. As of now, PPIRP is only made applicable for corporate persons (Company or LLP or body corporate with limited liability) classified as MSMEs under Section 7(1) of the Micro, Small, and Medium Enterprise Development Act, 2006. ("MSMED Act").[2] However, in times to come, PPIRP can also be extended to all body corporates, maybe with some stricter controls.[3]
BASIC PHILOSOPHY OF PPIRP:
The insolvency laws around the world provide a variety of pre-pack resolution processes, in addition to the regular resolution process. PPIRPs have surfaced as an innovative corporate resolution method that assimilates the virtues of both informal (out-of-court) and formal (judicial) insolvency proceedings. It beings with an informal understanding, engages the stakeholders in between, and ends with a judicial blessing of the outcome. Courts and IPs have a minimal role, and unlike CIRP, it does not yield if there is no resolution plan. Though PPIRP and CIRP are alternate options, some stakeholders may choose one over the other in certain circumstances.
Thus, it appears to be the preferred hybrid framework, as it allows the stakeholders to resolve the stress of a CD as a going concern, with the minimum interference and assistance of the State. It is considered fast, cost-efficient, and effective mode of stress resolution, thereby maximizing value and minimizing business disruptions by disassociating the stigma involved with the formal insolvency process. It safeguards the rights and interests of the stakeholders as much as in CIRP and has adequate checks and balances to prevent any potential misuse.
REQUISITES FOR PPIRP:
A CD, which is an MSME is eligible to apply for initiation of PPIRP, if it-
(i) has committed a default of at least ₹10 lakh[4];
(ii) is eligible to submit a resolution plan under section 29A of the Code;
(iii) has not undergone a PPIRP during the three years preceding the initiation date;
(iv) has not completed a CIRP during the three years preceding the initiation date;
(v) is not undergoing a CIRP; and
(vi) is not required to be liquidated by an order under section 33 of the Code.
To evidence that the CD is an MSME, the application shall attach either a copy of the latest and updated Udyam Registration Certificate or proof of investment in plant and machinery or equipment and turnover as per Notification No. 2119(E) dated 26th June, 2020 of the Ministry of MSMEs.
LINE OF ACTION FOR PPIRP:
The following steps are carried out under this mechanism:
PPIRP process commences only after (a) at least 66% of financial creditors ["FCs"] approve the proposal for PPIRP and confirm the name of Resolution Professional ["RP"]; (b) CD adopts a special resolution with 75% of members voting in favour of PPIRP; (c) CD prepares a Base Resolution Plan ["BRP"]; (d) The FC and CD agree on the name of the RP (e) Draft information memorandum is prepared.[5]
A corporate applicant may submit a PPIRP application with the AA by the Corporate Applicant in Form 1 as prescribed in PPIRP Rules, with required annexures.[6] Within 14 days of receipt of such application, the AA must either accept or reject the same[7]. In case of acceptance, he declares a moratorium under Section 14(3)(1) of the Code, appoints an RP, and orders him/her to make a public statement of PPIRP commencement.
The RP is required to assemble a Committee of Creditors [“COC”], verify the claims filed by the CD, monitor the administration of the CD's affairs, compile information memoranda, etc.[8]
The COC must be formed within 7 days of the initiation[9] and Code's Section 21 applies mutatis mutandis to a PPIRP.
After the order of admission by AA, a resolution plan should be submitted and approved within 90 days, and entire PPIRP process should be concluded within 120 days, which is divided into two parts: 90 days for the COC to approve the resolution plan and 30 days for adjudication by the adjudicating body. If the COC does not adopt a resolution plan within 90 days, then the RP must file an application to end the PPIRP.[10]
The resolution professional shall finalise the information memorandum with details under Regulation 40(2)[11] and submit it to members of the COC within 14 days.
The financial institutions maintaining accounts of the CD shall furnish all information relating to the CD available with them to the RP.[12]
The CD shall submit a list of claims under Section 54G(1) of the Code in Form P10 to the RP[13]. Claims will be updated from time to time.
The management of the affairs of the CD shall continue to vest in the Board of Directors or the Partners.[14] However, in certain cases, if the COC votes to give the control of the CD to the RP, then he/she must apply to the AA for this. On such application, the AA may, if satisfied that the corporate debtor's affairs are being managed fraudulently or negligently, direct the administration of the CD to the RP[15].
Then, the CD must submit the BRP to the FC before the start of PPIRP and to the COC within 2 days of the commencement. The plan must comply with Section 30 (1), (2), and (5) of the Code[16]. It may revise the BRP if permitted by the COC.
The COC may accept the BRP if it does not impair claims owed to Operational Creditors [“OC”] by the CD. If the COC does not approve the BRP or if the BRP impairs any claims owed by the CD to OC, the RP must invite prospective resolution applicants to submit other plans[17]. RP shall publish brief particulars of the invitation for resolution plans in Form P11, not later than 21 days from the PPIRP commencement date, in accordance with Regulation 43.
The resolution plans received in response to invitation and complying with the requirements of the Code and the Regulations shall be evaluated on the basis for evaluation. The resolution plan which gets the highest score shall be selected as best alternate plan ["BAP"] for competition with the BRP.[18]
The COC may consider BRP for approval if no resolution plan is received.
The COC may consider the BAP for approval if it is significantly better than the BRP. If it does not approve a significantly better BAP, the process terminates.[19]
If the BAP is not significantly better than the BRP, the RP shall disclose the scores of the BAP and BRP to submitters of these plans and invite them to improve their plans in accordance with Regulation 48.
The process of improvement shall continue till either of the submitters fails to use the option within the specified time. The resolution plan having higher score on completion of process of improvement shall be considered by the COC for approval. If the COC does not approve it, the process terminates.
The COC must approve a plan with 66% of the voting shares and send it to the AA[20]. The AA shall, within 30 days of receipt of the resolution plan, either adopt or reject the resolution plan and terminate the PPIRP[21].
AA can order liquidation if PPIRP terminated.[22]
JUDICIAL DECISIONS:
GCCL Infrastructure and Projects Ltd. [23] was the first PPIRP case in India. In this, The NCLT Ahmedabad Bench accepted the CD into PPIRP for Rs.54,16,250. The ruling noted that the CD had submitted an affidavit indicating its Section 29A eligibility, in accordance with Section 54A(2)(d) of the Code. While a Corporate Debtor is entitled to submit a BRP under the PPIRP framework, Section 29A(c) of the Code prevents promoters and directors from doing so. However, Section 240A exempts promoters/directors of MSMEs from the limitation imposed under Section 29A(c).
Later in November 2021, the NCLT New Delhi Bench accepted the plan of Loon Land Developers Ltd. [24]. By the agreement, it confers the Board of Directors with management over the CD entity. Nevertheless, it will be interesting to see how the 120-days deadline is met in these cases.
This threshold of 120 days was discussed in Krrish Realtech Private Limited [25] before the NCLAT. In this, several homebuyers objected to the PPIRP application, claiming it was not submitted in line with the Act. The NCLT allowed the Objectors to submit their objections and the CD to respond. On appeal, the CD asserted that the NCLT lacked authority to provide Objectors any opportunity to respond. The PPIRP is a time-bound program, therefore no option to oppose was envisioned for anybody, including the Objectors/Financial Creditors. Upholding the NCLT's ruling, the Appellate Authority noted that the CD suffered no prejudice since Objectors had time to register objections and the Appellant had time to respond. The NCLAT also uttered that as home-buyers/creditors are with large stakes; their worry must be relieved by ensuring that the PPIRP is used in line with the law.
BENEFITS OF PPIRP OVER CIRP: FEASIBILITY FOR MSMEs:
PPIRP has following inherent advantages over CIRP:
Preliminary work already done before filing application to AA – CIRP does not involve any preliminary steps before filing application to AA. However, PPIRP process commences only after (a) at least 66% of FCs approve the proposal for PPIRP and confirm the name of RP; (b) CD passes special resolution on 75% of members approval; (c) CD prepares a BRP; (d) Name of RP has been approved by FCs and CD.
Informal understanding with creditors before making formal application to AA for approval – Since, initial spade work is done before making application to AA, thus, some sort of informal understanding develops between FCs and CD. Pre-Pack Insolvency resolution plan allows creditors and debtors to work on an informal plan and then submit to AA for approval. Thus, flexibility is available in initial stages. Practically and effectively, it is a joint application by CD and FCs. Thus, chances of opposition at admission stage are less as it is usually a ‘win-win’ situation.
Fast approval and reduction of burden on NCLT – Since informal understanding has already been reached between FCs and CD, approval will be fast as practically there may not be opposition to resolution plan. Also, at stage of admission, detailed examination of issues will not be required.
Management continues with corporate debtor and hence no disturbance in running of enterprise – In CIRP, Management of CD is handed over to IRP/RP. Practically, it is impossible for him to manage an enterprise of which he has no idea or exposure at all. However, in PPIRP, the management continues with CD himself, except in case of fraud. Thus, disturbance in routine management of enterprise is negligible and also the risk of job losses is avoided.
Base Resolution Plan is good starting point – It is rightly said that one who wears the shoes knows where shoe pinches. Thus, the management of CD, which has inside knowledge of business, is in the best position to determine way of recovery (unless of course he is crook). The BRP prepared by CD having inside knowledge of business is a good starting point. In fact, if there is no impairment of OCs, COC can accept the BRP itself, with/without some improvements.
Corporate debtor is allowed to be partner with other person – It is specifically clarified that the CD may submit the base resolution plan either individually or jointly with any other person[26]. Thus, he can rope in financial or technical or marketing partner (as per requirement) and submit best possible resolution plan.
CONCLUSION:
The COVID-19 outbreak and accompanying lockdowns wreaked havoc on the economy, with small businesses suffering the brunt of the losses. Moreover, the traditional mechanism of insolvency resolution acted as an impediment for the speedy redressal of the liquidation process in case of the debt default done by the corporate debtors. Due to its time-consuming and complicated framework, the old technique, CIRP, proved ineffectual. As a result, the Pre-Packaged Insolvency Resolution Process ("PPIRP") was accepted as a one-of-a-kind and well-tailored insolvency resolution framework for struggling MSMEs. Since, MSMEs have an exiguous investment in plant and machinery, this process of PPIRP will be a blessing for both creditors and the management of MSMEs, as it will provide them with an opportunity to return quickly from bankruptcy by restructuring their liabilities and start with a clean slate. The safeguards included in PPIRP are likely to reduce the chances of misuse of the process. Therefore, it seems to be a well-thought-out initiative of the MCA and based upon a method which has received success abroad.
However, it has been seen that in usually CD suffer because of its management's activities. It is the management's actions that push the company into insolvency. Thus, authorizing the same to handle the organization while undergoing PPIRP may cause concerns of transparency. This could potentially damage the stakeholders claim.
[2] Section 54A(1) of Insolvency and Bankruptcy Code, 2016.
[3] Sub-Committee Report on PPIRP dated 31.10.2020.
[4] Notification No. S.O. 1543(E) dated 9-4-2021.
[5] Section 54A of Insolvency and Bankruptcy Code, 2016.
[6] Section 54C(1) of Insolvency and Bankruptcy Code, 2016.
[7] Section 54C(4) of Insolvency and Bankruptcy Code, 2016.
[8] Section 54E(1) of Insolvency and Bankruptcy Code, 2016. [9] Section 54F(2) of Insolvency and Bankruptcy Code, 2016.
[10] Section 54D of Insolvency and Bankruptcy Code, 2016.
[11] Insolvency and Bankruptcy Board of India (Pre-packaged Insolvency Resolution Process) Regulations, 2021.
[12] Section 54F(4) of Insolvency and Bankruptcy Code, 2016.
[13] Regulation 20(1) of the Insolvency and Bankruptcy Board of India (Pre-packaged Insolvency Resolution Process) Regulations, 2021.
[14] Section 54H of Insolvency and Bankruptcy Code, 2016.
[15] Section 54J1) of Insolvency and Bankruptcy Code, 2016.
[16] Section 54K(1), (2) and (3), Insolvency and Bankruptcy Code, 2016.
[17] Section 54K(4) and (5) of Insolvency and Bankruptcy Code, 2016.
[18] Section 54K(9) of Insolvency and Bankruptcy Code, 2016.
[19] Section 54K(10) and (11) of Insolvency and Bankruptcy Code, 2016.
[20] Section 54K(13) and (15) of Insolvency and Bankruptcy Code, 2016.
[21] Section 54L(1) of Insolvency and Bankruptcy Code, 2016.
[22] Section 54N(4) of Insolvency and Bankruptcy Code, 2016.
[23] CP(IB)/116/54/NCLT/AHM/2021.
[24] (IB)-(PP)-03(PB)-2021.
[25] (AT)(Ins) Nos. 1008,1009 & 1010 of 2021.
[26] Explanation I to section 54K of Insolvency and Bankruptcy Code, 2016.
Research work required for this article was completed by: Apurva Srivastava (2nd Year, RGNUL), and Utkarsh Shubham (3rd Year, FOL, AU), as Interns at S&D Legal Associates.