Pre-Package for MSMEs – Mitigating Distress with a Quicker Solution?

I. INTRODUCTION
The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 (“Ordinance”) has come into force via Gazette Notification dated 4th April 2021. The Ordinance recognises the distress faced by micro, small and medium enterprises (“MSMEs”) due to the COVID-19 pandemic. Therefore, as a mitigating measure it introduces pre-packaged insolvency resolution (“PIRP”) process for MSMEs to ensure “quicker, cost-effective and value maximising outcomes for all the stakeholders”¹.

Pre-package offers a hybrid insolvency framework that combines both informal i.e., out of court and formal judicial insolvency proceedings.² The restructuring plan is drawn by the creditors and the debtors before formalising it through approval of a judicial body, which, is the National Company Law Tribunal (“NCLT”) in the Indian scenario.³ The hybridity of this process is also comes from the combined role of the creditor in control and debtor in possession model.

II. KEY FEATURES

• Eligibility
• 1. MSMEs as provided under sub-section (1) of Section 7 of MSMEs Development Act, 2006 may apply for PIRP.
  2. Minimum default value to be notified by the Central Government which is decided to be Rs. 10 lakh but cannot be more than 1 crore.
  3. A corporate debtor (“CD”) cannot apply for PIRP if it –
     • has undergone PIRP or Corporate Insolvency Resolution Process (“CIRP”) during the three years preceding the initiation date.
     • is not undergoing CIRP
     • is ineligible to submit a resolution plan under Section 29A
• Timeline
  1. The entire PIRP must be completed in 120 days.
  2. The resolution professional must submit the plan to NCLT after getting approval from the committee of creditors (“CoC”) within 90 days.
  3. NCLT will have 30 days to approve the plan.
• Procedure
  1. The process can be initiated by MSME on its own or by lenders that represent 66% of the debt.
  2. The CD is required to submit a resolution plan to the resolution professional within two days from the commencement of PIRP.
  3. This plan is presented to the CoCs which may approve the plan. In case it is not approved, fresh bids shall be invited. This will be similar to Swiss Challenge.⁴
  4. Once the plan is approved, an application is to be filed in the NCLT to admit or reject it.

III. BENEFITS

1. Ease of resolving insolvency
   The usual CIRP is not only expensive but long drawn.⁵ It provides for maximum of 270 days for the whole process, which, as evident from Figure 1 is often not adhered to. There has been an increase in the number of CIRP cases that have taken more than 270 days since December 2018 till December 2020.
   Figure 1: Status of CIRP Cases ⁶In contrast, pre-pack offers faster resolution with maximum time limit of 120 days. In jurisdictions like UK and USA, pre-pack sales have often been completed in a matter of hours.⁷ It, therefore, is preferred mode by many companies. Further, multiple resolution options fosters efficient business environment. It is expected that similar benefits will be reaped by companies in India. This will further improve the ranking of India in ‘Ease of Resolving Insolvency’ as per World Bank’s Doing Business Reports.⁸

   There are, however, apprehensions that the 120 days time limit is too less considering the experience with CIRP. However, it must be noted that since PIRP already envisages CD and CoCs to be on the same page before proceeding further, it is likely that it will not suffer from the same problems as CIRP.

2. Adequate safeguards
   Despite the incumbent management being in-charge of the business of the defaulting company, they will be closely watched by resolution professionals (“RPs”) and the creditors. This is a distinguishing feature of the PIRP. A set of duties of the RPs have been provided both before theThe vigil will be in the form of constant reviewing by the RPs of the breach of obligation by the directors of the business. Further, the CoCs have the right to vest the management of the company to the resolution professional if they believe that its affairs are being fraudulently conducted or grossly mismanaged.⁹ This would but checks on the potential manipulation by the CD in terms of drawing a skewed plan.
3. Least disruption in the operation of business
   The pre-package process will be considered insolvency proceedings, however since base resolution plan is prepared by the troubled company itself¹⁰ and the corporate debtor stays in control of the management of the company, some dilution in the stigma attached to such proceedings is expected. The informal limb of the process may also address the coordination problems between the stakeholders. Creditors and debtors working in tandem is key for the success of pre-packages.Additionally, a recurrent obstacle in the CIRP has been the litigation initiated by promoters to retain control over the business which causes delays in conclusion of the process.¹¹ However in a pre-package setting, the promoters will continue to retain their control and therefore the delay caused by litigation is expected to reduce.

IV. CONCLUSION
For the PIRP machinery to work smoothly all its parts must run efficiently. Therefore, enhancing capabilities of NCLT is also necessary so that the process can be finished in the stipulated time.¹² Overall, the Ordinance is a welcome move and is in alignment with practice in various other jurisdictions. Its impact is anticipated to be huge as it covers around 60% of all the active companies. With adequate practice and evaluation of its functioning in the MSMEs sector, the process can be further refined and made available to other sectors.