Abstract
The Insolvency and Bankruptcy Board of India (Amendment) Act, 2021 was introduced by the Ministry of Law & Justice to safeguard micro, small, and medium enterprises (“MSMEs“) from financial challenges caused by the COVID-19 pandemic and to speed up the resolution and debt recovery process compared to the regular insolvency process. The Amendment Act of 2021 added Chapter III-A titled “Pre-Packaged Insolvency and Resolution Process” to Part II of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the “Code“). Any MSME which has a minimum default of INR 10 lac is eligible to initiate a pre-packaged resolution under the Code[2].
According to the 2017 IMF report, India ranks 33 out of 137 countries with a poor NPA ratio, with around 6.8 trillion in non-performing assets (“NPA“) held by public sector banks[3]. The Reserve Bank of India has also instructed banks to initiate the Corporate Insolvency Resolution Process (“CIRP“) under the Insolvency and Bankruptcy Code, 2016 to clear up the NPA in order to meet targets.[4] However, such a recovery could be time-consuming and damaging to the debtor’s image.
Against the above backdrop, this article is to emphasize the need for the introduction of a pre-packed resolution process with a wider ambit under the Indian Insolvency Code.
Meaning of Pre-Packaged Insolvency Resolution Process
The Pre-Packaged Insolvency Resolution Process (“PPIRP“) is an alternative to CIRP. It is a procedure in which the company’s members admit to having made default and seek to restructure the corporation and its operations by going through the resolution process. Only a corporation or a limited liability partnership categorized as an MSME (“corporate debtor“) is eligible for this scheme. A corporate debtor with a minimum default of INR 10 lakhs can apply to start PPIRP under this policy. The corporate debtor has to make an application to initiate PPIRP to the National Company Law Tribunal (“NCLT”) subject to fulfilling three conditions:
- A declaration by the majority of directors or partners for initiating PPIRP;
- Members of the corporate debtor or at least 3/4th of the total number of partners have passed a special resolution to initiate special resolution;
- Receive approval from financial creditors representing not less than sixty-six percent. in value of the financial debt due to such creditors, for the filing of an application for initiating PPIRP and receiving the nomination of the proposed resolution professional from the financial creditors.
The corporate debtor must file an application with NCLT within ninety days after the date of the directors’ declaration. The NCLT then has 14 days to decide whether or not to accept or reject the application. PPIRP begins on the date of admission if the application is accepted. If the application is refused, the adjudicating body must notify the Applicant within 7 days after receiving the notification to correct the defect in the application. The Amendment Act of 2021 establishes a requirement under the IBC that PPIRP be completed within 120 days following the tribunal’s acceptance of the application.
Options available for MSMEs
MSMEs now have the liberty of either choosing CIRP or PPIRP to resolve their debt problems. This option, however, is not available in all circumstances. PPIRP requires a minimum default of Rs. 10 lakhs, whereas CIRP requires a minimum default of Rs. 1 crore. For example, if a corporate debtor default by Rs. 2 crores, it can choose between CIRP and PPIRP, depending on its viability.
Incentives to Implement Pre-Package Scheme
Despite the fact that the country has dedicated bankruptcy legislation, several features of the general insolvency process under the Code still create a strong disdain for the current arrangements, thus, emphasizing the need for a pre-packaged approach.
Unlike CIRP, which allows financial creditors and operational creditors to apply to start the insolvency resolution process, PPIRP can only be started by corporate debtors, according to Section 54C of the IBC.
The whole management of the corporate debtor vests with the resolution professional once the CIRP is commenced, but in the PPIRP, the management vests with the corporate debtor, unless fraud is present. The claims are consolidated, settled, and verified by the resolution professional under PPIRP.
Under the PPIRP, the corporate debtor must submit to the NCLT a base resolution plan outlining the steps it plans to follow to resurrect the company. Financial creditors must first approve the base resolution.
The adjudicating body is needed to proceed within 14 days of receiving the application in order to initiate PPIRP. PPIRP must be completed within 120 days, according to the Amendment Act of 2021.
The pre-packaged plan is unquestionably a faster process than the IBC’s standard CIRP. Apart from reducing the burden of the courts, this can be seen as a positive strategy from the debtor’s perspective, as expedited proceedings will assist prevent the company’s goodwill from deteriorating.
Under this scheme, the dispute over a complete return to the creditor will be least expected since the pre-packaged negotiation would ensure maximum benefits for the creditors.
Challenges in the Implementation
The goal of this pre-packaged scheme is to reduce the CIRP’s harm to a business. To do so, the scheme allows the company’s promoters, who are typically the ones responsible for the default, to participate in the negotiation of a pre-packaged resolution plan, which overrides Section 29A of the IBC that disqualifies certain types of people from becoming resolution applicants. Furthermore, the Supreme Court has directed that Section 29A be applied strictly.[5]
The IBC(Amendment), 2018 adds Section 29A to prevent promoters, who are usually the actual defaulting parties, from gaining a backdoor entry into the administration of Corporate Debtor. Overriding such a clause would be a big issue for a pre-packaged settlement method to undertake.
Conclusion
An insolvency proceeding’s jurisprudence aims to save both creditors and defaulters. The IBC allows for such a rescue through the Corporate Insolvency Resolution Process, which is currently the best option for enterprises. However, there are some hazards associated with the CIRP. The CIRP processes take a long period, which has an impact on the debtor’s business. Furthermore, the time and cost of commencing a corporate insolvency process make small enterprises vulnerable to the system’s eventual demise. These enterprises contribute significantly to the country’s GDP while also providing employment. The closure of such a business would have an impact not only on the people who worked there but also on the economy. In light of this, the implementation of a general pre-packaged insolvency scheme can circumvent such obstacles, hence improving the convenience of conducting business.
The Pre-Packaged Insolvency Resolution Process is a step forward in the execution of a pre-packaged insolvency scheme. Currently, such a policy is only available to MSMEs, but expanding its scope could help to alleviate the burden of insolvency issues if it is implemented properly. As a result, the amendment of 2021 to the Code will aid in determining the viability of such a pre-packaged system in India.
[1] Priyanka Chauhan, a fourth-year law student at Government Law College, Mumbai
[2] Insolvency and Bankruptcy Board of India, https://ibbi.gov.in/uploads/legalframwork/e9b1c4b3489e51213db701b27222b474.pdf (last visited Feb. 25, 2022)
[3] Remya Nair, India has the second worst NPA ratio among large economies, The Print (last visited on Feb. 28, 2022, 8:30 PM), https://theprint.in/economy/india-has-the-second-worst-npa-ratio-among-large-economies/195844/
[4] Reserve Bank of India, https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=40743 (last visited March 1, 2022)
[5] Chitra Sharma v. Union of India, Supreme Court WP(Civil) No. 744/ 2017
