Brain Booster Articles
INDIA’S IBC CODE, 2016: ASSESSMENT OF DRAWBACKS OF
Author: Samriddhi Rai, B.A.,LL.B. from Banasthali Vidyapith
The Pre-Packaged Insolvency Resolution Process was introduced under the Insolvency and Bankruptcy Code, 2016 on 4thApril 2021 through Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021. The Pre-Packaged concept was introduced for "efficient alternative insolvency resolution process”[i] chiefly introduced for (MSMEs) micro, small, and medium enterprises. In addition, Insolvency and Bankruptcy Board of India with the Central Government of India for introducing the rules, regulations, and notification for operationalizing the Pre-Packaged process. The prime reason for introducing the Pre-Packaged concept for swift, cost-effective, and value-maximization. According to the ordinance, 2021 inserted chapter III-A which contains Sections from 54A to 54P under (IBC) Insolvency Bankruptcy Code. The rationale behind the introduction of the (PPIRP)[ii] Pre-Packaged Insolvency Resolution Process is to reduce the burden of the (NCLT) National Company Law Tribunals.
Author dealt with the different aspects of Pre-Packaged process, which creates the hurdle down the line. In addition, pandemic hit the global industry especially the corporate world ghastly. Therefore, Author delve the research into the current issue of the liquidation process, insolvency & bankruptcy, accumulation of cases pending in the NCLT, bring forth the loopholes, and suggested the modification and revisiting of the concept of Pre-Packaged scheme.
CONCEPT OF PPIRP
A Pre-Packaged Insolvency Resolution Process is an alternative of CIRP[iii] (corporate insolvency resolution process) and the PPIRP is an out of court settlement process where the “restructuring of the corporate debtor is agreed in advance with the creditors and other important stakeholders of such debtor before insolvency is declared" the process is informal nature settlement and referred as a hybrid mechanism.[iv]
The process of PPIRP is ‘debtor- in- possession with a creditor- in- control’ where financial creditors and promoters while insolvency process negotiates with the financially distressed company for informal resolution plan for the restructuring of the company business beforeembarking on the formal insolvency proceedings. After the final resolution base plan subsequently the plan submitted in front of the court (NCLT) for seeking approval.[v]
The difference between CIRP and PPIRP is Corporate Insolvency Resolution Process is referred to as formal insolvency process which is stipulated in the code, this process is time-taking and involves costs, on the other hand, in Pre-Packaged Insolvency Resolution Process referred to as informal process, flexible, alternative, cost-effective, time-efficient, and without any statutory backing.
Currently, after the pandemic hit in 2019 to protect the MSMEs the Central Government has decided for increasing the insolvency application threshold from 1 lakh to 1 crore. The Central Government in wake of the Covid-19 pandemic took this decision and other reliefs were also granted to the MSMEs such as "sector-relevance provisions, relief from asset classification banking standards, loan repayment moratorium, and the suspension of insolvency proceedings by the creditors”
PRE-PACKAGED SCHEME DRAWBACKS
1. Firstly, PPIRP is based on the bedrock of ‘debtor-in-possession’ where default promoters are permitted to participate in the process of daily company operations and they have complete control over the company assets. In simple words, the company, which is facing financial distress from creditors, is not comfortable with the defaulters managing and participating in the company operational process. Which becomes an issue of litigation or they want to opt for CIRP down the line. In addition, as per the code section, 54H was inserted to maintain the sanctity of the process, and all the corporate affairs shall be managed or governed under a statutory provision, if any misconduct is discovered, under section 54J power to transfer control over the management is vested to the lenders.
2. Secondly, there is uncertainty in the moratorium period because it leads to the problem of legal proceedings the reason behind this drawback is PPIRP doesn't have the provision of the moratorium period where promoters are allowed for the revival of the operations of the company without any interruption from the stakeholders or creditors.
3. Thirdly, lack of transparency in the process related to transactions because default promoters are managing and controlling the assets of the company there is the possibility of willful conduct from the default promoters, which only increase the uncertainty in the process, and lenders will shift to the CIRP or it tends to increase the litigation.
4. Fourthly, the problem of connected parties involved in the Pre-Packs process might be there is a possibility that connected parties will take over the debtor business in simple words if this situation arises then it will create a lack of transparency because the debtor will remain to be a part of the company which further arises the problems for the creditors down the line.
5. Fifthly, it doesn't matter PPIRP is an informal insolvency process, however, according to procedures which are stipulated in the code each stage of PPIRP they are reliant on the NCLT which increases the applications for approval such as- first application filed for the initiation ofthe PPIRP then, the application has been filed for the final resolution plan and if lenders want to shift the process under section 54J then another application has to be filed which water down the sole objective of the Pre-Packaged Insolvency Resolution Process for what this scheme was introduced in this code and overburdening of the court will ultimately be increased.
6. Sixthly, two issues need to be addressed the first one is containing Section 29A of IBC there are some cogent reasons according to Section 29A if a financial distress company wants to initiate the PPIRP then the defaulting debtor has to fulfill all criteria laid down in this Act Section 29A(c) “debars the person and its management whose account has been classified as Non-Performing Asset (NPA) for last 1 year from the commencement of the insolvency proceeding” and Section 29A(h) “debars the guarantor of the corporate debtor under insolvency” the problem with the criteria somewhere it should be relaxed for MSMEs under the Pre-Packaged Resolution Process.[vi] There are some reasons such as MSMEs chiefly collect all the interest of the promoters, connected parties in such scenario outside investors won't be interested to participate in the process, another reason is quantum of the cap is kept of Rs. 1 crore default which is a small amount in PPIRP because it is evident in India there are many companies or business is unable to pay their debts, especially in this pandemic mostly business went into the financial distress only because of economical loss not because of malafide act, willful intention, and management failure, another reason is MSMEs referred as the prime key generator of employment and contribution in the economic growth, lastly there is a problem regarding the bid-offer where prospective resolution applicants including ineligible promoters might be willing to pay higher than other bidders, however, due to restricted provisions, creditors have to settle down in less amount than prospective resolution bidders. The second issue is related to the 'Pheonixing'[vii] in simple words where the company puts its business intentionally under liquidation process or restructuring with the sole objective of buying back in the form of an identical company and managed by the identical members. In addition, this could happen due to limiting the restrictions under Section 240A and Section 29A which leads to the engagement in the illegal practice.
7. Seventhly, the role of IRP (Insolvency Resolution Principal) is opaque in PPIRP because unlike CIRP Insolvency Resolution Professional is appointed immediately after the application is approved, however, in PPIRP the appointment of IRP is completed after the completion of the court proceedings related to the presentation of the application before the NCLT.[viii]
Currently, the situation in India is not stable and creating mayhem in the industrial sector and the pandemic effect will be continued down the line. In such a scenario where the Pre-Packaged scheme was introduced by 2021 ordinance is a welcoming step under IBC, 2016, however, the Pre-Packaged scheme is already in the existence and working in US and UK, however, it is important to note that there is a difference between India and these two countries and for effective and efficient results from this scheme it is crucial to conduct an assessment and comparative study to modify it and ensure that the challenges and drawbacks in this scheme. Another triggered issue is related to the ‘Pheonixing’ practice which creates the havoc situation and the Indian IBC should be amended and adopt the akin process that of “pre-pack pool in the UK”[ix] according to this process independent body of corporates experts conducts the scrutiny of sales involving connected parties with the majority of COC.
Without a doubt PPIRP is an innovative step in the IBC, however, there are some challenges and drawbacks which needs to be addressed for significant results and effective process for MSMEs because this alternative in comparison of other procedures is effective and efficient, however, there some impediments and loopholes in this scheme and it is the need of the hour to revisit the IBC and pre-packaged scheme, especially in this pandemic for better results and effective process for MSMEs down the line.
[i]Debanshu Mukherjee, Aishwarya Satija, Akash Chandra Jauhari, Manmayi Sharma, Oitihjya Sen, ‘Pre-Packaged Insolvency Resolution under the Insolvency and Bankruptcy Code (IBC): An Overview’ (VIDHI Center for Legal policy, 15 April 2021) <Pre-Packaged Insolvency Resolution under the Insolvency and Bankruptcy Code (IBC): An Overview (vidhilegalpolicy.in)> accessed 12 March 2022 [ii]Krrishan Singhania, Srishti Singhani & Ashuthosh V, ‘Indian Insolvency Law and Pre-Pack Insolvency Resolution Process: An Analysis: Part 1’ (IndiaCorpLaw, 21 October 2021) <https://indiacorplaw.in/2021/10/indian-insolvency-law-and-pre-pack-insolvency-resolution-process-an-analysis-part-1.html> accessed 12 March 2022 [iii]Pulkit Gera, ‘PRIRP for MSME Sector: Revisiting the scope of resolution applicants Under Section 29A’ (RMLNU Law Review Blog, 1 April 2021) <https://rmlnlulawreview.com/2021/06/01/prirp-for-msme-sector-revisiting-the-scope-of-resolution-applicants-under-section-29a/> accessed 12 March 2022. [iv]Government of India Ministry of Corporate Affairs, ‘ Report of the Sub-Committee of the Insolvency Law Committee on Pre-packaged Insolvency Resolution Process’ (2021) paras 1.34- 1.36 <https://www.ibbi.gov.in/uploads/whatsnew/34f5c5b6fb00a97dc4ab752a798d9ce3.pdf> accessed 12 March 2022. [v]Debanshu Mukherjee, supra note 1 [vi]Ajay Kumar, ‘India: Pre Packaged Insolvency Resolution Process: Section 29A(c) and (h) Exemption for Resolution Applicant Or MSME Debtor?’ (mondaq, 06 May 2021) <https://www.mondaq.com/india/insolvencybankruptcy/1065376/pre-packaged-insolvency-resolution-process-section-29ac-and-h-exemption-for-resolution-applicant-or-msme-debtor> accessed 12 March 2022. [vii]Pratik Datta, ‘Promoter buy-back in insolvency: ‘Pheonixing' in India’ (OBLB, 15 Dec 2017) <https://www.law.ox.ac.uk/business-law-blog/blog/2017/12/promoter-buy-back-insolvency-phoenixing-india> accessed 12 March 2022. [viii]Abhirup Dasgupta and Ishaan Duggal, ‘India: Independence Of Resolution Professionals’ (mondaq, 10 July 2020) <https://www.mondaq.com/india/insolvencybankruptcy/964100/independence-of-resolution-professionals> (accessed 12 March 2022). [ix]Jacqueline Ingram and Damilola Odetola, ‘United Kingdom: Core Elements of a Pre-Pack Administration’ (LEXOLOGY, 11 December 2019) <https://www.lexology.com/library/detail.aspx?g=b05feb5b-58bc-43c7-9358-86205d78a378> accessed 12 March 2022.