I hope that you all are aware about the Ordinance i.e. Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 which has been come into effective at once, promulgated by President on 4th April, 2021.This Ordinance amends the Insolvency and Bankruptcy Code 2016 (‘IBC or Code’) to allow the Central Government to notify such pre-packaged process for defaults up to Rupees One Crores. As per said amendment, in the Insolvency and Bankruptcy Code, 2016, in section 4, after the proviso, the following proviso shall be inserted-

“Provided further that the Central Government may, by notification, specify such minimum amount of default of higher value, which shall not be more than one crore rupees, for matters relating to the pre-packaged insolvency resolution process of corporate debtors under Chapter III-A.”.

Further, a new Chapter III-A PRE-PACKAGED INSOLVENCY RESOLUTION PROCESS is inserted, after Chapter III by the aforesaid amendment.

Micro, Small and Medium Enterprises are critical for India’s economy as they contribute significantly to its gross domestic product and provide employment to a sizeable population.  It is considered necessary to urgently address the specific requirements of micro, small and medium enterprises relating to the resolution of their insolvency, due to the unique nature of their businesses and simpler corporate structures. Further, it is considered expedient to provide an efficient alternative insolvency resolution process for corporate persons classified as micro, small and medium enterprises under the Insolvency and Bankruptcy Code, 2016, ensuring quicker, cost-effective and value maximising outcomes for all the stakeholders, in a manner which is least disruptive to the continuity of their businesses and which preserves jobs. In order to achieve these objectives, it is considered expedient to introduce a pre-packaged insolvency resolution process for corporate persons classified as micro, small and medium enterprises.

Further, it is necessary to inform you that a sub-committee of the Insolvency Law Committee (‘ILC’) was constituted by the government vide order dated 24th June, 2020, in order to structure the pre-pack framework. The ILC has designed a pre-pack framework within the basic structure of the IBC for the Indian market. The same has been detailed in their report dated 31stOctober, 2020. The Ministry of Corporate Affairs (‘MCA’) vide a notice dated January 8, 2021, also invited public comments and views on its proposed Pre-packaged Insolvency Resolution Process (PIRP). Please refer the detailed report of October 31, 2020 submitted by ILC for your kind perusal.

Now, the Government has used the Ordinance route to introduce PIRP for companies classified as micro, small and medium enterprises under sub-section (1) of Section 7 of the Micro, Small and Medium Enterprises Development Act, 2006.

With the aforesaid amendment, many readers knew, first time, about the word Pre-Packaged Insolvency. Apparently, the said word Pre-Packaged Insolvency does not describe the exact meaning in itself. It appears that ‘pre-pack’ has no statutory definition. It is probably because it has evolved over the time, differently in different jurisdictions and every jurisdiction has a unique variant(s) of pre-pack, which allows the stakeholders to modify it further to an extent to suit their needs. It has different nomenclature such as Pre-packaged Insolvency Resolution, Pre-arranged Insolvency Resolution and Pre-plan Sale in the USA, Pre-pack Sale in the UK, Scheme of Arrangement in Singapore, etc. As nomenclature suggests, Pre-pack is a Restructuring Plan which is agreed to by the debtor and its creditors prior to the insolvency filing, and then sanctioned by the court on an expedited basis. In the UK context, it generally refers to a pre-agreed business sale by an insolvency practitioner which does not require prior court and/or creditor sanction.

Recently, many professionals have asked me to explain the term Pre-Packaged Insolvency, but I could not be able to define the same in a very smooth way in one shot unless and until they have something knowledge about the purpose of existing Code, its success rate till date and unpredicted conditions of market as such due to Covid-19 Pandemic.

Today, I am trying, by this article, to understand the term Pre-Packaged Insolvency. But going ahead, we have to understand the background of those companies which are under stress. What endeavours may be taken to rescue the life of these companies having serious threat to its life? We all, would never like to see corporate death, revert this will put our all efforts to save the life of company, as we know about the bad impacts of corporate death in the economy. Our existing Code is also doing the same work by Corporate Resolution Insolvency Process (CIRP) i.e. to save the life of corporate with a suitable resolution, till the company reached on ventilator and there is no further hope. Moreover, existing code is also trying to realise the maximum value of the asset of corporate so that promoters could grab the next opportunity. When the life of corporate cannot be save, then existing Code try to realise the maximum value of the asset of corporate by order of liquidation.

Now, it is necessary to review the objective of the Code and if some unfavourable circumstances are prevailing, in which the objective of the Code is not achieving, then, what may be the best options to achieve these objectives. I would like to submit that after reading this article, we will be able to find out a new option (Pre-Packaged Insolvency) to achieve the objectives of existing Code.

Now, I start my discussion with a question “Whether we should close companies under stress and release their resources? It means any company which is under financially stress should be close immediately and release their resources for further opportunity. In another way, suppose my business is not doing well, then, should I close the same and sell all the assets of business to invest in next business?

To take the decision of closure, first we should check the viability of the busines despite of the business is not doing well. There is lots of reasons of failing of a company in market economy. One of them is failure due to on account of innovation and competition. We can put here the major example of Nokia, Kodak etc. and now LG (Mobile Business closed). Where such companies are unviable, then it is necessary to facilitate their closure and release their resources for other competing uses or business purposes and grab the emerging opportunities.

However, there may be many cases where the industry is doing well, but the company in question is not doing well for many reasons such as inefficiency of the management to compete at marketplace. Moreover, most such companies are generally viable. Other cases may be that a company may not be doing well for force majeure circumstances such as coronavirus disease (COVID-19). As most such companies are viable, therefore, they would start earning profits as soon as the circumstances become normal.

The question is still pending- ‘whether we should close such viable business/companies and release their resources for other competing uses or business purposes and grab the emerging opportunities?’

We know very well that closure of such viable business/company is not in the interest of the stakeholders i.e. shareholders, creditors, employees, suppliers, and customers and also the economy. But, if the closure is not in the interest of stakeholders, then, what to do for or by such companies?

For this, it is necessary to facilitate stakeholders to resolve the stress well in time before the financial stress converted into economic stress otherwise resolution (i.e. revival plan) may be impossible. Generally, a company in stress often resolves stress on its own by improving its competitiveness at marketplace. But it is not necessary that it will succeed always. In other way, the company may sit across a table with its stakeholders, either individually or collectively, to work out a plan to resolve stress.

Out of the options available to the company, there are two court supervised statutory options, and two out-of-court options. The Court supervised statutory options are as under-

(a) CIRP under the Insolvency and Bankruptcy Code, and

(b) Scheme of Compromise or Arrangement (‘SoA’) under the Companies Act, 2013.

The two out-of-court options are –

(a) the RBI’s prudential framework for resolution of stressed assets; and

(b) informal understanding between a debtor and creditor, with /without help of a mediator. A creditor has access to these options to resolve stress of its debtors, in addition to several options for recovery of its loans.

CIRP under the Code

The Insolvency and Bankruptcy Code, 2016 has been passed after great deliberation and pursuant to various committee reports, the most important of which is the report of the Bankruptcy Law Reforms Committee of November, 2015. The Statement of Objects and Reasons of the Code reads as under:

“STATEMENT OF OBJECTS AND REASONS

There is no single law in India that deals with insolvency and bankruptcy. Provisions relating to insolvency and bankruptcy for companies can be found in the Sick Industrial Companies (Special Provisions) Act, 1985, the Recovery of Debt Due to Banks and Financial Institutions Act, 1993, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the Companies Act, 2013. These statutes provide for creation of multiple fora such as Board of Industrial and Financial Reconstruction (BIFR), Debt Recovery Tribunal (DRT) and National Company Law Tribunal (NCLT) and their respective Appellate Tribunals. Liquidation of companies is handled by the High Courts. Individual bankruptcy and insolvency is dealt with under the Presidency Towns Insolvency Act, 1909, and the Provincial Insolvency Act, 1920 and is dealt with by the Courts. The existing framework for insolvency and bankruptcy is inadequate, ineffective and results in undue delays in resolution, therefore, the proposed legislation.

2. The objective of the Insolvency and Bankruptcy Code, 2015 is to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the priority of payment of government dues and to establish an Insolvency and incidental thereto. An effective legal framework for timely resolution of insolvency and bankruptcy would support development of credit markets and encourage entrepreneurship. It would also improve Ease of Doing Business, and facilitate more investments leading to higher economic growth and development.

3. The Code seeks to provide for designating the NCLT and DRT as the Adjudicating Authorities for corporate persons and firms and individuals, respectively, for resolution of insolvency, liquidation and bankruptcy. The Code separates commercial aspects of insolvency and bankruptcy proceedings from judicial aspects. The Code also seeks to provide for establishment of the Insolvency and Bankruptcy Board of India (Board) for regulation of insolvency professionals, insolvency professional agencies and information utilities. Till the Board is established, the Central Government shall exercise all powers of the Board or designate any financial sector regulator to exercise the powers and functions of the Board. Insolvency professionals will assist in completion of insolvency resolution, liquidation and bankruptcy proceedings envisaged in the Code. Information Utilities would collect, collate, authenticate and disseminate financial information to facilitate such proceedings. The Code also proposes to establish a fund to be called the Insolvency and Bankruptcy Fund of India for the purposes specified in the Code.

4. The Code seeks to provide for amendments in the Indian Partnership Act, 1932, the Central Excise Act, 1944, Customs Act, 1962, Income-Tax Act, 1961, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the Finance Act, 1994, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the Sick Industrial Companies (Special Provisions) Repeal Act, 2003, the Payment and Settlement Systems Act, 2007, the Limited Liability Partnership Act, 2008, and the Companies Act, 2013.

5. The Code seeks to achieve the above objectives.”

(Emphasis Supplied)

One of the important objectives of the Code is to bring the insolvency law in India under a single unified umbrella with the object of speeding up of the insolvency process.

There are several laws which regulate ‘Insolvency Resolution’ for Companies in India. These include (i) Sick Industrial Companies Act, 1985, (ii) Recovery of Debt Due to Banks and Financial Institutions Act, 1993 (DRT Act, 1993), (iii) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI), and Companies Act, 2013.

These laws provide for the restructuring of debt, seizure and sale of the debtor’s assets for repayment of outstanding loans. Similar laws such as the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920 regulate insolvency resolution for individuals. While these laws specify processes for resolving Insolvency, a creditor may also approach civil courts for recovery of debt.

The Insolvency and Bankruptcy Code (‘Code’) seeks to consolidate the existing framework by repealing the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920. In addition, it amends 11 laws including Companies Act, 2013, DRT Act, 1993 and SARFAESI Act, 2002.

The Preamble of the Code states that it is “An Act to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto.”

We know that the first and foremost objective of the Code is reorganisation and Insolvency Resolution of Corporate Debtor (‘CD’). It means revival of companies is prime objective and current code envisages rescue of a CD as a ‘going concern’. It means current Code never like death of Corporate except in adverse conditions for its liquidation.

The current Code has been recognised in resolving Corporate Insolvencies, which is “creditor friendly”as against the previous “debtor controlled” regime. The Code benefited both, the Creditors and CD. It is pertinent to note that Code endeavours to rescue the life of a company when it is under serious threat to its life.

We all know that in a company, there is two main stakeholders say one Shareholders and other Creditors. The shareholders have complete control over the company and the creditors, despite of loan given to company, have no involvement in the business. Shareholders take the decisions to run the business. But in case where the company fails to pay the debt on time, the control of the company should shift to the creditors for resolving insolvency. It has been seen in last many years that several companies, including large ones, changed hands consequently i.e. from CD to creditor. The current Code redefined the debtor-creditor relationship.

In old regime, there was no such concept. The creditors had to wait till cows come home to get milk i.e. their debt. For more understanding, the creditors have to wait for realisation in the process of liquidation. Now, we can say that the current Code redefined the balance of power among the stakeholders of a company in terms of their interests and rights.

Under the current Code, stakeholder has right to trigger Corporate Insolvency Resolution Process (CIRP) of the CD in case where a threshold amount of default of debt (i.e. Minimum Rs. 1 crore as on date). If CIRP has been triggered the CD moves away from ‘debtor-in-possession’ to ‘creditor-in-control’ and management of debtor and its assets vest in an Interim Resolution Professional (IRP) and then to a Resolution Professional (RP) and later to a successful Resolution Applicant (RA).

An IRP/RP runs the CD as going concern, prohibits suspension or termination of supply of essential and critical services, mandates continuation of licences, permits and grants, stays execution of individual claims, enables raising of interim finances for running the CD and constitutes a Committee of Creditors (CoC) to take commercial decisions in respect of the CD.

In this process, IRP/RP insulates Resolution Applicants (RAs)from the misdeeds of the CD under the erstwhile management, etc. and invites feasible and viable resolution plans from eligible and credible RAs for resolution of insolvency of the CD. IRP/RP allows only capable and credible persons to submit resolution plans, which has the potential to expel the current promoters.

A resolution plan envisages limitless possibilities of resolution and may entail a change of management, technology, or product portfolio; acquisition or disposal of assets, businesses or undertakings; restructuring of organisation, business model, ownership, balance sheet; strategy of turn-around, buy-out, acquisition, takeover; and so on.

If the CoC approves a resolution plan within the stipulated time with 66% voting share, the CD continues as a going concern. If the CoC does not approve a resolution plan with the required voting share within this period, the CD mandatorily undergoes liquidation.

Thereafter, a resolution plan approved by the Adjudicating Authority (AA) is binding on all stakeholders, including Central Government, State Governments, and any Local Authority to whom the CD owes debt under any law. CD enjoys several privileges like moratorium, and binding outcome, and regulatory benefits such as, exemption from public offer under takeover Code, set off of brought forward loss against book profits for the purpose of Minimum Alternate Tax, etc.

It is also notable that CD can also initiate CIRP voluntarily in case of stress. But the data indicate that less than 3% of CIRPs that commenced during 2019-20 were self-initiated by CDs.

The second objective of current Code is maximising value of assets of the company. To achieve this object, the Code mandates revival of a company in a time-bound manner, as undue delay is likely to reduce the enterprise value of the company. When the company is not in sound financial health, the possibility of resolution may be impossible or remote, in case there is long uncertainty about its ownership and control i.e. long period of IRP/RP in CIRP. The strict adherence to timelines is of essence to both the triggering process and the insolvency resolution process. It is mandatory to complete a CIRP within 180 days, with a onetime extension of up to 90 days. The current Code and regulations provide a model timeline for each task in the process, which needs to be followed as closely as possible.

In the earlier regime, the CD could indefinitely continue to enjoy the protection given under Section 22 of the Sick Industrial Companies Act, 1985 or under other such enactments which has now been forsaken. In the new approach, there is a calm period followed by a swift resolution process to be completed within 270 days (outer limit) failing which, initiation of liquidation process has been made inevitable and mandatory.

Recently, it has been seen that non-co-operation by the current promoters and management in some CIRPs are leading to intense litigation. The litigation and determination of several issues, including avoidance transactions, has been a challenge to the limited capacity of the AA. For several reasons, including litigation, it has generally not been possible to adhere to timelines envisaged under the Code as regards commencement of CIRPs as well as their closure. From the data bank, 250 CIRPs, which have yielded resolution plans by the end of June, 2020, took, on average 380 days (after excluding the time excluded by the AA), for conclusion. Similarly, the 955 CIRPs, which ended in orders for liquidation, took, on average 312 days, for conclusion. The longer a CD stays in the state of insolvency, the higher is the cost, both direct and indirect.

The Third objective of current Code is promoting entrepreneurship, availability of credit and balancing the interests of all stakeholders. Therefore, if there is a RA who can continue to run the CD as a going concern, every effort must be made to try and see that this is made possible. Even after an order for liquidation is made, the Code enables the liquidator to sell the CD as a going concern. It enables revival and continuation of the CD by protecting it from its own management and from death by liquidation.

CIRP requires an RA to rescue a failing company through a resolution plan. When every company, every industry and every economy is under stress, the likelihood of finding an RA to rescue a failing company is remote. If all failing companies were to undergo insolvency proceeding, most of them may end up with liquidation for want of saviours to rescue them. Upon such liquidation, the companies would have a premature death and the assets would have distress sale, therefore, would less realisation for creditors. This neither resolves the stress nor maximises the value of assets and, hence is not consistent with the objectives of the Code. In view of non-availability of RAs, the Code made another course correction to suspend filing of applications for initiation of CIRP in respect of defaults arising during COVID-19 period.

We should also note that CIRP is not available in respect of defaults arising during COVID-19 period. It is not available in respect of defaults of less than Rs.1 crore as well as for stress before default. Further, the availability of RAs would continue to be a concern for quite some time, as the business conditions are unlikely to return to pre-pandemic levels soon. The inevitable consequence when a CIRP fails to find an RA discourages the stakeholders to resort to CIRP.

Schemes under the Companies Act, 2013

Another Court supervised statutory options is Scheme of Compromise or Arrangement (‘SoA’) under the Companies Act, 2013 (CA 2013). Section 230 of the CA 2013 offers Scheme of Arrangement (SoA), which enables a company to restructure its liabilities and/or capital structure to turnaround the business, with the approval of NCLT. Though, his concept has genesis in the English Law, it has evolved in India through the Indian Companies Act, 1882, the Indian Companies Act, 1913, the Companies Act, 1956 and eventually the Companies Act, 2013. Consequently, it has acquired a substantial body of rich jurisprudence. The Courts have given a very wide interpretation to the terms ‘compromise’ and ‘arrangement’ to include a wide array of transactions of the nature of financial and corporate restructuring.

SoA is an in-court framework, where an application is made by the company, any creditor, any member, or the liquidator before the NCLT proposing a compromise or arrangement between a company and its (i) creditors or any class of them; (ii) members or any class of them. Upon such application, the NCLT may order meeting of creditors or class of creditors, or members or class of members, as the case may be. It may dispense with the meeting of creditors or class of creditors where such creditors or class of creditors having at least 90% value confirm, by way of an affidavit, to the SoA. A notice of the meeting is sent to all creditors and members along with the details of the proposed SoA, apart from publishing it on the website of the company and in the newspaper. Notice is also sent to Central Government, Income-tax authorities, respective Stock Exchange, SEBI, Competition Commission of India, if necessary, and such other regulator or authorities which are likely to be affected by the SoA and are required to make representations, if any, within a period of thirty days from the date of receipt of the notice, failing which it is presumed that they have no representations to make on the proposed SoA.

Any objection to the SoA can be made only by persons holding at least 10% of the shareholding or having at least 5% of the total outstanding debt. If the SoA is approved by three-fourths (3/4) in value of creditors or class of creditors, or members or class of members, as the case may be, and is also sanctioned by the NCLT, it becomes binding on the company, all the creditors or class of creditors, members or class of members, as the case may be, and also the liquidator and the contributories of the company. Further, NCLT, while approving the SoA or at any time, thereafter, may make any modifications in the SoA for proper implementation of the scheme. Where it is satisfied that the sanctioned scheme cannot be implemented satisfactorily, it may order winding up of the company.

Though SoA has certain advantages such as wider scope, availability for stress prior to default, less disruption to business, cram down and binding effect, in practice, it has not gathered much grip as a tool for resolution of financial stress. Some of the reasons attributed for this are:

(a) The absence of any calm period, like moratorium in case of CIRP, often leads to fast tracking of suits, proceedings, and enforcement actions by stakeholders against the company during the process;

(b) An SoA requires approval by three-fourths (3/4) in value of creditors or members, which is challenging at times, as compared to threshold of 66% voting share of creditors under the Code;

(c) An SoA is binding on the company, all the creditors or class of creditors, members or class of members, as the case may be, unlike everyone in case of CIRP; and

(d) There is no time limit within which the process must be completed and has the potential of misuse, particularly as it is based on debtor-in-possession model.

RBI’s Prudential Framework

One of the out-of-court options is RBI’s prudential framework for resolution of stressed assets. The RBI provides a prudential framework for early recognition, reporting and time bound resolution of stressed assets. The framework applies to entities such as banks and non-banking financial companies (NBFCs) regulated by RBI. It requires the lenders to put in place its Board approved policies for resolution of stressed assets, including the timelines for resolution.

In case of default by any of the borrowers, the lenders are required to undertake a review of the borrower’s account and decide on the resolution strategy, including nature of resolution plan within the review period, which is thirty days from such default. The lenders may also choose to initiate legal proceedings for insolvency or recovery under the law.

In cases where the resolution plan is to be implemented, the framework requires the lenders to enter into an inter-creditor agreement (ICA) during the review period. In respect of large accounts, where aggregate exposure of borrower to the lenders is above Rs.1500 crore, the resolution plan needs to be implemented within 180 days from the end of the review period.

Where a viable resolution plan in respect of a borrower is not implemented within the specified timelines, the lenders are required to make additional provisions as percentage of total outstanding. However, the framework introduces certain incentives once resolution is pursued under the Code. It provides that half of the additional provisions would be reversed on filing of insolvency application and the remaining upon admission into CIRP. It also incentivises the lenders to provide interim finance to CDs undergoing CIRP by allowing them to treat such finance as ‘standard asset’ during CIRP.

But the prudential frame work is affected with certain challenges, which include:

(a) The framework is available in respect of stress of a CD which has RBI regulated creditors;

(b) The framework hinges on an ICA to provide that any decision by lenders representing 75% by value of total outstanding credit facilities and 60% of lenders by number shall be binding upon all the lenders. This has been difficult to obtain, particularly from creditors like insurance companies, mutual funds, debenture holders, real estate allottees, offshore creditors, etc., who are outside RBI’s domain. Such creditors may invoke the formal insolvency resolution process under the Code that jeopardises resolution under the prudential framework;

(c) Being out-of-court mechanism, the framework does not provide for breathing space in the form of a moratorium on suits, proceedings, and recovery actions against the CD during the restructuring;

(d) The plan binds only those Financial Creditors(FCs) who are signatories to the ICA. It does not also bind Operational Creditors (OCs). This limits the scope of the plan to only financial restructuring, which may not be adequate to resolve stress.

The framework has been recently modified to provide a special window to resolve pandemic induced stress, without change of ownership, within the said prudential framework. This envisages lenders to implement resolution plans of eligible borrowers, having stress on account of COVID-19, without change in ownership, while classifying such exposures as ‘standard’, subject to specified conditions. This is in departure to the norms where under a resolution plan involving any concession to the borrower requires an asset classification downgrade, except when it is accompanied by a change in ownership. This framework applies to both personal loans and corporate exposures. With respect to corporates, only those accounts which were classified as standard and not in default for more than 30 days with any lending institution as on 1st March, 2020 (i.e., not beyond SMA-0) and which continues to be standard till invocation of resolution process, are eligible.

The resolution process is invoked with an agreement between the borrower and the lending institution, in cases involving single lending institution, and between the borrowers and the lenders representing 75% by value and 60% by number, in cases involving multiple lending institutions. The resolution under this framework is to be invoked not later than 31st December, 2020 in case of corporate loans and must be implemented within 180 days from the date of invocation. In cases involving multiple lending institutions, where resolution process is invoked all lending institutions are required to sign the ICA within 30 days. It is open to lenders not covered by the framework also to sign ICA if they so desire. If lending institutions representing minimum of threshold do not sign the ICA, the process ends, and it cannot be invoked again under the framework. The framework also incentivises the lenders to sign ICA, by prescribing different norms of additional provisioning and reversal of such provisioning in respect of non-signatories to ICA.

The framework, inter alia, envisages constitution of an Expert Committee by RBI to make recommendations on the required financial parameters to be factored in the resolution plans, with sector specific benchmark ranges for such parameters. The Expert Committee shall also undertake the process validation for the resolution plans to be implemented under this framework, without going into the commercial aspects, in respect of all accounts with aggregate exposure of Rs.1500 crore and above at the time of invocation.

The RBI has also extended its existing scheme of one-time restructuring in respect of existing loans to MSMEs which are classified as ‘standard’. This is made available to those MSMEs whose aggregate exposure to banks and NBFCs do not exceed Rs.25 crore as on 1st March, 2020 and it was a standard asset as on that date. It provides asset classification benefits by allowing borrower account classification to be retained as standard and allowing upgradation of classification as standard in respect of those accounts which slipped into NPA category between 2nd March, 2020 and date of implementation. The restructuring needs to be implemented by 31st March, 2021. It is, however, early to see the outcome of resolution framework introduced on 6th August, 2020.

Informal Options or Bilateral Negotiations

Another option to remove stress is where the debtor and creditors may address the stress outside any formal framework, whether there is a default or not. They may sit across a table to work out a resolution that meets their requirements, with or without assistance of mediators. Since implementation of the current Code, there is a preference to resolve stress without resorting to a formal framework. It is to be noted that 14,510 applications filed with NCLT for initiation of CIRP were withdrawn at pre-admission stage, indicating resolution arrived at by the relevant parties.

However, such informal resolutions are not popular for reasons like the stakeholders find it difficult to travel on an unguided path, there is no moratorium, resolutions arrived at by them do not enjoy the sanctity and benefits of a resolution arrived under a formal framework, etc.

Pre-packaged Insolvency

In the background of above, it can be said that each of the resolution options has certain advantages as also limitations. The option under the Code is more comprehensive in terms of parties involved and scope and strategies for resolution of stress and usually includes an element of restructuring. It offers certain advantages and privileges such as moratorium during resolution period, binding nature of resolution plan, clean slate post resolution, regulatory benefits, etc., which are not available in case of other options. This explains market preference for CIRP as a mode of resolution and demand to revoke suspension on filing of applications for initiation of CIRPs.

While the preferred option for resolution, namely, CIRP has difficulties at this hour, the liabilities of the debtor in respect of defaults – COVID-19 induced or otherwise – under various other laws are not suspended, except to the extent of moratorium allowed by RBI. This has two consequences – either the company remains under stress for too long without any resolution or the creditors seek every means to recover their dues. In either case, the company may not be able to survive.

It is pertinent to mention that the process under the Code requires both time and money to fructify considering the direct and indirect costs involved. Litigation would be an initial cost in terms of engaging lawyers, accountants, RPs and their teams; indirect costs would include loss of business of the corporate debtor and loss of business because a company is undergoing CIRP, loss of goodwill, etc. In view of these, many debtors today prefer to resolve stress at early stages and are making best effort to avoid consequences of CIRP: they are resolving stress when it is imminent, on receipt of a notice for repayment but before filing an application to initiate CIRP, after filing application but before its admission, and even after admission of the application. The evidence is withdrawal of applications filed for initiation of CIRP in respect of 14,510 CDs at pre-admission stage, closure of CIRPs of 218 CDs under section 12A of the Code, termination of CIRPs by the AA, closure of CIRPs on taking note of settlement recorded by the mediator, and even settlements at the level of the Apex Court – where the parties worked out a resolution amicably resulting in swift revival of the CDs.

A fair debtor-creditor relationship, induced by the current Code, has prompted several resolutions in its shadow or on its account. Both empirical and anecdotal evidence suggest that the Code has rebalanced the relationship between debtors and creditors to a large extent and is leading to more responsible decision making by both debtors and creditors which is encouraging a large number of out-of-court workouts. The relationship between creditor and debtor continues evolving worldwide and is about to be tested all over again.

A formal framework (Resolution under CIRP) has a set process and, therefore, some amount of rigidities. However, market prefers flexibility to work out a tailor-made resolution best suited to the circumstances. The options available for resolution today, as discussed above, are either fully formal or fully informal and, therefore, they may not be conducive for all circumstances. The business needs an alternate option for resolution, which is between formal and informal options.

In this regard, Pre-pack has emerged as an innovative corporate rescue method that incorporates the virtues of both informal (out-of-court) and formal (judicial) insolvency proceedings. It seems as a semi-formal or hybrid option which has an element of informality, but sanctity and advantages of a formal process. It empowers stakeholders to resolve the stress of a CD as going concern, with the minimum assistance of the State. It is considered fast, cost efficient, and effective in resolution of stress. It starts with an informal understanding, engages the stakeholders in between, and ends with a judicial blessing of the outcome. Because of its very nature, a pre-pack has to have a very high level of support from its stakeholders, thereby ensuring the highest chances of revival of the company. This is a necessity as without promoter cooperation; it would be nearly impossible to negotiate a pre-pack.

A pre-pack is the resolution of the debt of a distressed company through anagreement between secured creditors and investors instead of a public bidding process. Under the pre-pack system, financial creditors will agree to terms with a potential investor and seek approval of the resolution plan from NCLT. The approval of a minimum of 66 per cent of financial creditors that are unrelated to the CD would be required before a resolution plan is submitted to the NCLT. Further NCLTs are also required to either accept or reject any application for a pre-pack insolvency proceeding before considering a petition for a CIRP.

What is Pre-Packaged Insolvency Resolution Process (PIRP)?

PIRP is a quasi-formal procedure which integrates the essence of an out of court private restructuring and that of a formal bankruptcy. It is a pre-planned insolvency procedure where a resolution plan is formulated and finalised prior to the initiation of formal proceedings.

An application for initiating pre-packaged insolvency resolution process may be made in respect of a corporate debtor classified as a micro, small or medium enterprise under sub-section (1) of section 7 of the Micro, Small and Medium Enterprises Development Act, 2006.

Where a corporate debtor meets the requirements of section 54A, a corporate applicant there of may file an application with the AA for initiating pre-packaged insolvency resolution process. The pre-packaged insolvency resolution process shall be completed within a period of one hundred and twenty days from the pre-packaged insolvency commencement date. The AA shall declare a moratorium and cause a public announcement during pre-packaged insolvency resolution process. The CD shall, within two days of the pre-packaged insolvency commencement date, submit to RP list of claims and preliminary information memorandum.

During the pre-packaged insolvency resolution process period the management of the affairs of the corporate debtor shall continue to vest in the Board of Directors or the partners, as the case may be, of the corporate debtor, subject to such conditions as may be specified.  The Board of Directors or the partners, as the case may be, of the corporate debtor, shall make every endeavour to protect and preserve the value of the property of the corporate debtor, and manage its operations as a going concern.

The resolution professional shall, within seven days of the pre-packaged insolvency commencement date, constitute a CoC, based on the list of claims confirmed under clause (a) of sub-section (2) of section 54F.  Where CoC, at any time during the pre-packaged insolvency resolution process period, by a vote of not less than sixty-six percent. of the voting shares, resolves to vest the management of CD with the RP, RP shall make an application for this purpose to the AA, in such form and manner as may be specified.

If the AA is satisfied that the resolution plan as approved by CoC under sub-section (4) or sub-section (12) of section 54K, as the case may be, subject to the conditions provided therein, meets the requirements as referred to in sub-section (2) of section 30, it shall, within thirty days of the receipt of such resolution plan, by order approve the resolution plan. Any appeal from an order approving there solution plan shall be on the grounds laid down in sub-section (3) of section 61.

Remark: PIRP require a much higher degree of expertise of IP, as under such option, they have a much higher degree of control. Moreover, creditors will have to develop a level of trust not only in such IP but also the frame work put into place so that there is cohesion between creditors at the time of negotiation and approval of plans. At the same time, CD have to be aware of their own self-worth as they have to identify and execute proper decisions to undergo pre-pack insolvency without resorting to desperate acts of litigation to prevent it. With the increase in the trend of out of court settlements, pre-pack insolvency may be the next alternative to regular CIRP proceedings.

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Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.

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