This Guest Article is authored by Gajanand Kirodiwal, Advocate at Atlas Law Partners as part of the RFMLR-IBBI Blog Series Competition.

1. Stress Resolution Regime in India:

In India, a company in stress may resolve its stress either on its own by negotiating with its stakeholders by working out a plan to resolve stress, or it may resort to a statutory framework. There are two statutory options available to a stressed company, namely, (a) Corporate Insolvency Resolution Process (“CIRP”) under the Insolvency and Bankruptcy Code, 2016 (“IBC”) and (b) scheme of compromise or arrangement (“SoA”) under the Companies Act, 2013. It also has two out-of-court options, namely, (a) the RBI’s prudential framework for the resolution of stressed assets and (b) informal understanding between a debtor and creditor.

IBC mandates and aims for the revival of a company/corporate debtor (“CD”) in a time-bound manner. However, when the CD is not in sound financial health, prolonged uncertainty about its ownership and control may make the possibility of resolution remote, while reducing the enterprise value of a CD. The strict adherence to timelines is of essence to both the triggering process and the insolvency resolution process.

Sections 230-232 of the Companies Act, 2013 offer SoA, which enables the company/ies to restructure their liabilities and/or capital structure to turn around the business, with the approval of the National Company Law Tribunal (“NCLT”). Under Section 230, an Application may be made to the NCLT essentially seeking approval of the scheme of compromise and arrangement between the parties. Such compromise and arrangement, has be to between the members and creditors of the company. Whereas under Section 232, schemes of a merger or the amalgamation of any two or more companies for the reconstruction of the company/ies specifying the purpose of the scheme (where the assets can also be transferred by a transferor company to the transferee company) are filed before the NCLT for approval. Additionally, the RBI provides a prudential framework for early recognition, reporting, and time-bound resolution of stressed assets.

2. Amendments to the IBC:

The IBC since its inception in India has seen a host of amendments paving way for its successful application and execution. However, the Fifth Amendment to the IBC prohibited the use of the CIRP in times of COVID-19.

The government looking at the market scenario and expectations started exploring the feasibility of a hybrid resolution framework having minimal court supervision on out-of-court pre-negotiated restructuring schemes. Hence, a time and cost-effective ‘pre-packaged’ bankruptcy scheme was thought of to aid the existing CIRP framework. It invited suggestions for the implementation of pre-packaged insolvency resolution.

While the world and India were faced with the COVID-19 pandemic, the Insolvency Law Committee (“ILC”) on May 16, 2020, decided to constitute a sub-committee to study the Pre-Packaged Insolvency Resolution Process (“PPIRP”) for time-efficient insolvency resolution and sought its recommendations. The sub-committee submitted its recommendations on October 31, 2020, to the Government of India. On basis of the said recommendations of the sub-committee, a decision was taken to amend the IBC.

Accordingly, an Ordinance was issued on April 4, 2021, making amendments to the IBC and introducing a PPIRP for corporate persons classified as micro, small and medium enterprises. The Ordinance has been thus passed by the Parliament as IBC (Amendment) Act, 2021 w.e.f. April 4, 2021.

The said Ordinance introduced the PPIRP process, which is pre-negotiated insolvency to offer faster insolvency resolution of a distressed corporate/company through an agreement between secured creditors (unrelated financial creditors constitute the COC in PPIRP) instead of a public bidding process. In fact, the PPIRP is a sequel to Section 10A of the IBC where a stressed CD can itself approach the NCLT for its resolution.

For PPIRP, Chapter III-A (Sections 54A to 54P) has been introduced in the IBC. Further, the Insolvency and Bankruptcy (Pre-packaged Insolvency Resolution Process) Rules, 2021 (“Rules”) and Insolvency and Bankruptcy Board of India (Pre-packaged Insolvency Resolution Process) Regulations, 2021 (“Regulations”) have been notified in April 2021.

3. Pre-Packaged Insolvency Resolution Process

PPIRP is a process that allows the creditors as well as the debtors to work out a resolution plan for the revival of a company under stress and is unable to carry out its day-to-day operations, without getting involved in the lengthy court proceedings and approvals. In PPRIP, the promoters of the CD are allowed to participate actively and the board of directors remains alive unlike in a CIRP.

A PPIRP includes the following steps:

a. PPIRP formally begins when an unrelated financial creditor having not less than 10% of the total debt proposes the name of an RP and is approved by 66% of unrelated financial creditors. Alongside, the majority of Directors or Partners of the CD, as the case may be, give a declaration for initiation of PPIRP within 90 days to be conducted by the approved RP. It is specifically declared by them that PPIRP is not being initiated to defraud anyone. Further, a special resolution is also required to be passed for approving the PPIRP.

b. Such RP then constitutes a Committee of Creditors (“COC”) after collating their claims. After the constitution of the COC, the corporate debtor itself presents a base resolution plan which does not impair the debts of the operational creditors. Once the base resolution is approved by 66% vote of the COC, an application is filed before the NCLT by the CD for initiation of PPIRP.

c. The application before the NCLT is filed by the Corporate Applicant (including the CD) in the requisite Form provided under the Rules along with various Forms prescribed under the Regulations including a report of the RP confirming that the CD has complied with all the requirements for initiation of the PPIRP of the CD and is eligible to submit a resolution plan.

d. On the filing of such an application, the NCLT within 14 days, either admits it, if all criteria are fulfilled or rejects it when the CD does not fulfil the requirements as prescribed. The NCLT can also direct the CD to rectify the defects before admitting the application. The effect of such an admission/pre-packaged insolvency commencement date (“PPICD”) is that the appointment of RP is in effect confirmed and a moratorium is declared for RP to conduct the resolution process within 90 days of PPICD. Pertinently, during the moratorium, the Board of the CD remains in existence and can conduct the affairs of the CD.

e. RP then takes over and is obligated to complete the process within 90 days of PPICD. RP formally makes a public announcement of PPIRP and undertakes the resolution process which is akin to CIRP. After the public announcement, it collates all claims of the creditors received and within 7 days of PPICD forms a COC afresh based on the claims. RP also appoints registered valuers within 3 days of PPICD for forming an opinion on avoidance transactions, if any. RP may accordingly move to NCLT in case he is of the view that the CD has conducted avoidance transactions.

f. RP can otherwise call for the COC meeting and present the base resolution plan as submitted by the CD, for voting. COC may in its wisdom either approve the base resolution plan or call for other comparatively better plans if it deems appropriate. In that event, the base resolution plan goes into the Swiss Challenge mechanism, where the CD would have to either match the comparatively better resolution plan/s or face the risk of losing the CD as it goes into liquidation. The COC can also recommend for termination of PPIRP or recommend initiation of CIRP.

g. If any of the resolution plan/s is approved and meets the basic requirements of the IBC, the RP files for approval of the said plan before the NCLT.

4. Advantages of the PPIRP:

A minimum default of Rupees Ten Lakhs for initiation of PPIRP has been prescribed by the Government of India as opposed to Rupees One Crore in the case of CIRP. CD, therefore, has an option to initiate the PPIRP even on default of a comparatively smaller amount. Preliminary work of the resolution process of the CD is completed by CD, COC, and the appointed RP before applying for initiation of the PPIRP of the CD, to the NCLT.

PPIRP allows negotiations with all stakeholders to prepare a base resolution plan leaving almost no scope for calling fresh resolution plans before making a formal application to NCLT for approval. In fact, the CD can bring in a joint resolution applicant after consulting all stakeholders, in the best interest of the CD.

Even during PPIRP, a Swiss Challenge to the base resolution plan is allowed which is enabled by Section 54K (11), thereby allowing the best possible resolution price for CD’s assets. As prescribed under Section 54D (1), 120 days is the outer time limit for completion of resolution of a CD from the PPICD, while the Board of the CD is allowed to carry out the business of CD during the moratorium period as imposed on PPICD. This ensures minimal disruption to the business and assets of the CD.

NCLT intervention is limited to the approval of the appointment of RP, declaration of moratorium after the informal process is completed, and finally at the stage of approval of the resolution plan. NCLT is also not likely to see a bunch of objection applications against the approval of the resolution plan, as seen in CIRP cases. Thereby the NCLT is not burdened with the pendency of applications.

5. Limitations, concerns, and suggestions:

• PPIRP is currently available to a Corporate Debtor which is a registered MSME and CDs other than the MSMEs, therefore cannot apply and avail the benefits of this resolution regime. Hence, PPIRP has limited its scope and applicability and thus, a large number of corporates/companies are not included and hence are ineligible for PPIRP resolution. PPIRP’s potential in case of resolution of such other stressed companies is yet to be tested. The starting point could be the inclusion of companies with a minimum annual turnover and are in default of a specific amount that may be prescribed. Such inclusions would pave way for more effective implementation and utilization of the PPIRP regime.

• PPIRP is over-dependent on the RP since NCLT interference is minimal. Though Chapter IIIA provides for roles and responsibilities of the RP, detailed do’s and don’ts for RPs are required to be put in place. Additionally, the aspects of valuation need to be clarified to ascertain the correct market value of the CD and the registered valuers can accordingly have more guidance for performing their duties.

• The PPIRP amendment also lacks clarity on haircuts to financial creditors in the resolution plan. Haircut in the context of the IBC is a difference between the amount of debt owed to a creditor by the CD and the actual amount allotted to the creditor under a resolution plan. Usually, such reductions are made by the resolution applicants to make their resolution plans more viable while taking over the CD as a going concern. Section 54K (4) of the IBC only provides that the debt of the operational creditors cannot be impaired and a base resolution plan which does not impair any claims owed by the corporate debtor to the operational creditors may be approved by the COC. However, no such specific provision is in place in respect of the financial creditors, and therefore a specific provision in this regard may guide the COC better while considering a base resolution plan. Such a provision will also help the CD and the resolution applicant to deal with the debts of financial creditors and structure their re-payments better under the base resolution plans.

• There is another crucial aspect of PPIRP which remains vague and unexplained. Since the PPIRP is meant only for MSMEs and for which proof of MSME registration is required to be filed mandatorily before the NCLT. However, there is no clarity as to the MSME registration date of a CD. IBC only prescribes that the CD should be an MSME on the date of initiation of the informal PPIRP process and it does not put a rider as to when a CD should have registered itself as an MSME. Hence, it needs to be clarified whether there is any bar on the CDs for initiating PPIRPs that are already incorporated and have registered themselves as MSMEs after April 4, 2021, the effective date of the amendment.

• Since the inception of IBC in the year 2016, the adherence to timelines prescribed for the resolution of CDs has been a cause of concern for all the stakeholders owing to various reasons including vacancies in the NCLTs across India. IBC as originally introduced, allowed 180 days for completion of CIRP with an extension of 90 days, which later came to be amended by the Insolvency and Bankruptcy Code (Amendment) Act, 2019 to restrict the time period of 330 days from the CIRP commencement date. This was owing to the delays on various counts. However, even this amendment has failed to achieve its objective and cases continue to breach the prescribed timelines. Now the admitted cases of PPIRP before the NCLTs are also suffering the same fate despite making most of the resolution process informal and having all possible approvals in place.

• The delays caused in the resolution process directly affect the value of the asset of the CD and it is quite possible that the value may go down drastically when the resolution is actually approved. This adversely affects the prospects of the CD and also hampers the interest of the successful resolution applicant who has agreed to invest a certain amount for taking over the CD as a going concern. Presently, there are no provisions to deal with such delays and their financial implications for the stakeholders.

6. Conclusion:

In view of the analysis above, it can be concluded that the introduction of PPIRP in the IBC is a step towards progressive insolvency and bankruptcy regime. Since we have yet not seen the approval and implementation of a resolution plan under the PPIRP, many of the practical issues would arise for consideration by domain experts at an appropriate stage. However, in the meantime, the apparent issues can be considered suitably and addressed for achieving the purpose of the PPIRP including the stricter enforcement/ adherence of timelines prescribed by filling up the vacancies at NCLTs and equipping them with adequate infrastructure to handle the increasing caseload.