The Pre- Pack Insolvency Regime – The Ultimate “Relief Pack” for the MSME’S

INTRODUCTION:
In our earlier section, we had highlighted the key features and benefits of the Pre-Packaged Insolvency Resolution Process (“PPIRP”) framework introduced by the Central Government vide Ordinance dated April 4, 2021 (“Ordinance”). In this article, we attempt to discuss the various issues that are required to be addressed to ensure that the PPIRP regime can achieve its stated object, by expediting the resolution of distressed micro, small and medium enterprises (“MSMEs”), facing the economic distress due to COVID-19 Pandemic.

The Ordinance seeks to provide an efficient, alternative insolvency resolution framework for such corporates that are classified as MSMEs, under the Insolvency and Bankruptcy Code, 2016 (“IBC”), and to ensure quicker, cost-effective and value maximising outcomes for all the stakeholders of MSME, in a manner which is least disruptive to the continuity of MSMEs businesses.¹

To ensure that the PPIRP framework is put into effect on immediate basis, the Insolvency and Bankruptcy Board of India, on April 9, 2021, has notified – (a) the Insolvency and Bankruptcy Board of India (Pre-packaged Insolvency Resolution Process) Regulations, 2021 (“PPIRP Regulations”)² & Insolvency and Bankruptcy (Pre-packaged insolvency resolution process) Rules, 2021 (“PPIRP Rules”) – for enabling immediate operationalisation of the PPIRP Process.³

The PPIRP Regulations deals with the following:

1. the eligibility criteria to act as resolution professional (“RP”), and the terms of appointment of the RP;
2. eligibility criteria of registered valuers;
3. identification and selection of authorised representative;
4. public announcement and claims of stakeholders;
5. information memorandum;
6. meetings of the creditors and committee of creditors;
7. invitation for resolution plans;
8. evaluation between the base resolution plan and the best resolution plan;
9. vesting management of corporate debtor with resolution professional; and
10. termination of PPIRP.

Whereas the PPIRP Rules provide for the procedure and the format under which the application is to be filed by the corporate applicant to initiate the PPIRP process under the IBC.

Minimum default threshold:
Not all MSEMs are entitled to avail the benefit of PPIRP mechanism. The Central Government vide notification dated April 9, 2021 has specified that the – PPIRP mechanism is available for only such MSMEs, where the minimum amount of default is INR 10 lakhs.⁴

ISSUES TO BE ADDRESSED UNDER THE CURRENT PPIRP REGIME:
The PPIRP is a much-needed “economic relief – vaccine” for the MSMEs reeling under the economic distress of the COVID-19 Pandemic. However, there are certain issues that need to be addressed, to ensure that the PPIRP regime is able to further strengthen the Indian insolvency resolution framework. These issues inter alia include: –

1. PPIRP framework – not applicable to all MSME’s: The Ordinance specifies that an application for PPIRP can be made only by corporate applicant/debtor (“CD”) which qualifies as a MSME under Section 7(1) of the Micro, Small and Medium Enterprises Development Act, 2006. Further, the PPIRP Regulations encompasses only companies within the ambit of the PPIRP framework and excludes other forms of MSMEs such as partnerships firms, sole proprietorship and HUF’s. This further restricts the number of MSMEs, who can opt for PPIRP.
2. Errant Promoters can regain entry in the corporate debtor – A CD while applying for PPIRP is required to comply with all the conditions set out under Sec.29A of IBC. However, Sec.240-A of the IBC has carved out an exception for MSMEs wherein they are exempted from complying with the requirements of Sec 29A(c)⁵ & 29A(h)⁶ of the IBC. The Ordinance broadens the benefit of the aforesaid exemptions to MSMEs applying under the PPIRP regime. This is a glaring disparity as the stand taken by the Sub-committee of Insolvency Law Committee (“ILC”) on PPIRP had recommended that that exemption under Section 29A to promoters with NPAs should not be provided. Allowing this exception will allow the promoters having accounts classified as NPAs to submit plans under the PPIRP (i.e., permitting back door entry), which would in turn defeat the purpose of revival of the CD as envisaged under the Ordinance.
3. Debtor in control & possession (“DICP”) approach is a delusion – The DICP approach as envisaged under the Ordinance allows the Board of Directors of the CD to manage its affairs, subject to scrutiny by the RP, and other ancillary conditions as set out under Regulation 50 (2) of PPIRP Regulations, whereby it is kept open for the CoC to decide which actions of the CD shall be requiring the prior approval of the CoC, during the course of the PPIRP of the CD. Therefore, the so-called debtor in control and possession, is always subject to the control of the CoC.
4. CoC given the discretionary power to reject a resolution plan – If under PPIRP, the CoC disapproves the base resolution plan (“BRP”)⁷, then bids from eligible resolution applicants are invited to compete with the BRP, thereby initiating the same resolution process provided under the IBC except under accelerated timelines. The CD in possession model envisaged by the Ordinance becomes pointless when the power still vests with the CoC in rejecting the BRP submitted by the CD even if it fulfils all the conditions laid down under Section 30(2) of the IBC.
5. Reduced Transparency under PPIRP as compared to CIRP – Lack of transparency is one of the main shortcomings of PPIRP process as the financial creditors (“FC’s”) will reach an agreement with the potential resolution applicants, through a private closed-door process and not an open bidding process. Thereby not safeguarding the interest of all class of creditors [especially operational creditors (“OC’s”) and unsecured creditors].
6. Moratorium – Under the PPIRP the safeguard provided to the CD in the form a Moratorium is not in effect during the pre-pack negotiations unless the application for initiating PPIRP is admitted under Sec.54 C of the IBC , which in turn will cause impediments during the prepacks negotiations stage between the CD and the FC’s, as the CD will always run the risk of being taken to any forum, court and/or tribunal by any of the stakeholders and/or class of creditors pending the admission of the PPIRP application, thereby stalling the pre-pack process.

SUGGESTIVE MEASURES ON THE WAY FORWARD:

1. The predominant control of the CoC on the PPIRP could be lessened, so as to ensure that PPIRP framework reaches its full potential in terms of an alternative insolvency resolution mechanism to CIRP under IBC.
2. To counter the discretion given to CoC to reject a resolution plan, it will be in all the stakeholders interest, if certain criteria’/ conditions are set out under the PPIRP, which if complied with, requires the CoC to approve the base resolution plan absolutely and look no further, thereby making the PPIRP a feasible and viable option for all class of CD’s.
3. Participation of OC’s should be included during the discussion and negotiation stages with the CD under the PPIRP, to ensure a fair and transparent process.

With the aforesaid issues to be addressed, it will be interesting to see, if the Ordinance will be able to achieve its object with the current framework or it will have to evolve over a passage of time, through further amendments, clarifications and judicial pronouncements, to realize its complete potential.