PRE-PACKAGED INSOLVENCY: WHETHER SUITABLE FOR A MSME IN THE CONTEXT OF IBC, 2016


Preface:

The businesses, markets and global economies has been impacted due to the COVID-19 Pandemic. The worst affected sector facing financial distress due to the Pandemic is the micro, small and medium enterprises – MSME sector in India. The MSMEs are critical for India’s economy as they contribute significantly to its gross domestic product and provide employment to a sizeable population. In fact, the Government of India has relied heavily on the MSME sector and has introduced many of namely, Skill India, Vocal for Local etc.


The Government of India has taken several measures to mitigate the distress caused by the Pandemic and has introduced various measures to protect the MSME sector from the shadow of Pandemic resulting in finance distress. The measures, among others, include increasing the minimum amount of default for initiation of corporate insolvency resolution process to Rs. 1 Crore as against the earlier threshold of Rs. 1 Lakh under the Insolvency and Bankruptcy Code, 2016 and suspending filing of applications for initiation of corporate insolvency resolution process (“CIRP Process”) in respect of the defaults arising during the period of one year beginning from 25th March 2020 till 24th March 2021.


Introduction of Pre-Packaged Insolvency Resolution Process (“PPIRP”):

The introduction of the Insolvency and Bankruptcy Code, 2016 (“Code”) in India was a leap forward to release the lenders from the undue delay and hardship which they have to face to recover their dues from the defaulting borrower. This was essential in the Indian context to attract investors who often has to face innumerable legal hurdles to come out of the investment when the company in which they have invested shows stress. One of the sectors which showed maximum stress and was badly affected by the Pandemic was the MSME Sector. Hence, the Government of India considered it expedient to introduce a “P P I R P” for MSMEs i.e. the corporate persons classified as micro, small and medium enterprises as per MSME Act, 2006 as amended in July 2020.


The Insolvency and Bankruptcy (Amendment) Ordinance, 2021 was promulgated by President Ram Nath Kovind on 4th April, 2021 (“Amendment Act”) to bring into force the prepackaged insolvency resolution framework for MSMEs. On 9th April, 2021, the Insolvency and Bankruptcy (Pre-packaged Insolvency Resolution Process) Regulations, 2021 (“Regulations”) as well as the Insolvency and Bankruptcy (Pre-Packaged Insolvency Resolution Process) Rules, 2021 (“Rules”) have been notified with immediate effect.


Worldwide experience shows pre-packs have commonly been fruitful in protecting endeavour esteem. For example, a report by an indebtedness board brings up that greater part of pre-packs in the U.K. have been effective in safeguarding occupations. Exploration in the U.S. credits pre-packs for diminishing the time taken by courts, in affirming a re-association plan, to half.


Overview of the PPIRP under the Code:

A pre-pack is a resolution plan which has been mutually agreed between the two parties i.e. debtors and creditors before initiating any statutory proceedings. Usually this deal is negotiated and then finalised by both the parties. It isn’t a plan known only to India, rather it is a worldwide strategy adopted by different nations. The main objective behind these deals is to curtail the time that the debtor takes in filing the application before the adjudicating authority. Therefore, in simple terms it can be said that this deal is an agreement between the parties for a mutual negotiation process. In comparison to a regular CIRP under the IBC, pre-packs have the benefit of being a more casual cycle and the chance of conclusion in a more limited timeframe. Pre-pack gives the partners adaptability in working out a consensual, however proficient, methodology for viable goal and worth amplification that might be troublesome under the conventional insolvency/bankruptcy strategy.


Summarized Pre-pack Framework under the Code:

The pre-packaged resolution framework is applicable for maximum default value up to Rs 1 crore and can be filed under Section 54C of the Code. The minimum default threshold for initiation of PIRP by a MSME borrower is fixed at Rs10 lakh. It also states that the Corporate Debtor himself to initiate this PIRP provided that it cannot be applied for filed or pending IBC cases and Section 29A shall apply to resolution applicants at the same time under PIRP. The PIRP cannot run in parallel to CIRP. Pre-pack cannot be initiated within 3 years of closure of another pre-pack or CIRP and the PIRP is to be completed within a period of 120 days from the date of commencement of such process. The entire mechanism of a PPIRP revolves around the one time settlement with the lenders, before exploring the NCLT route for resolution of the debts. In the event a Resolution Professional is appointed by the to prepare the resolution plan for restructuring the debt obligations of the borrower to be submitted before the lenders / bankers of the borrower, the role of a resolution professional during the PPIRP is mostly supervisory and not managing the borrower unlike under CIRP. The resolution professionals have to liaison with the management of the borrower to come up with a resolution/ restructuring plan. In case 66% of the creditors are agreeable to the resolution plan as envisaged by the management of the borrower, the same will have to be filed before the Adjudicating Authority. The entire cost incurred for the conduct of the PPIRP has to be borne by the borrower alone. Further, the Code provides a preference to an application filed under Section 54C of the Code than under Sections 7, 9 or 10 of the Code. In the event a PPIRP fails, i.e. to say that the lenders/ creditors does not approve the restructuring plan, the PPIRP ends at that point in time and the borrower shall stand at its original position before initiation of the PPIRP.


Conclusion:

MSMEs are an important sector for the Indian economy and have contributed immensely to the country’s socio-economic development. It not only generates employment opportunities but also works hand-in-hand towards the development of the nation’s backward and rural areas. It is expedient to provide an efficient alternative of insolvency resolution process for entities classified as micro, small and medium enterprises ensuring 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 & in order to achieve these objectives which the PPIRP promises to achieve. However, since it is an evolving mechanism only time will tell the tale.


The author is of the opinion and view that such pre-packaged insolvency process should not be limited to the abovementioned small MSMEs. The scope has to be enlarged and it should be made applicable to industries/ borrowers having a turnover of certain amount and may act as a pre-CIRP resolution mechanism. The reason for this suggestion stems from the fact that as on date the Tribunals in their capacity as Adjudicating Authorities are over burdened with filings and effective disposal of the matters within the time limit stipulated under the Code often is given a miss both with the blessings of the Adjudicating Authority or the Appellate Authority or the Supreme Court. Such events may not be intentional, however the rights available to the litigants often plays a driving force for such delays. It has been held by the Supreme Court in Surendra Trading Co vs Juggilal Kamlapat Jute Mills Co Ltd and Ors. (Civil Appeal No. 8400 of 2017) that the time limit prescribed for admission or rejection by the Adjudicating Authority is directory and not mandatory in nature, even though the Supreme Court has given an outer limit of 330 days to complete the process.


A precondition that it is necessary for the Financial Creditors and the Borrower to approach PPIRP and try to arrive at a resolution before approaching the Adjudicating Authority under Section 7 or Section 10 will bring in the necessary transparency in the CIRP Process. This will also allow the working class who solely depend on the said institution to put force on the borrowers to arrive at a meaningful settlement with the lenders.


In fact, the Author is of the opinion that this process should start much before the account is declared as a Non Performing Asset and any such settlement arrived should be brought in to the Adjudicating Authority to approve the same so that such settlement obtains the legality and failure to comply with the same should send the borrower company automatically to the CIRP under the Code.

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