PRE-PACK PROCESS UNDER INSOLVENCY AND BANKRUPTCY CODE

Introduction

The Central Government recently promulgated the IBC Amendment Ordinance 2021, allowing a pre-packaged insolvency process for micro, small and medium enterprises. The stated Ordinance has been introduced for minimizing the draconian impact of stress in the corporate segment amid COVID, with an objective to rescue business in stress and promote entrepreneurship and credit available in the economy. Apart from this new process, India’s Rank moved up from 132 to 52 in terms of resolving insolvency in the World Bank Group’s Doing Business Reports. In the global innovation index India’s rank improved from 111 in 2017 to 47 in 2020 in ease of doing Business.[1] It has different nomenclature as pre-plan sale in the USA, pre-pack sale in the UK and scheme of arrangement in the Singapore.

The scheme of Pre-Pack Insolvency envisages the debt restructuring of the stressed corporate business through there promoters by partially interference of the Adjudicating Authority(s), no transfer of management and control viz. control in the hand of corporate debtor qua appointment of the Resolution Professional (“RP”), protecting the commercial wisdom of the Committee of Creditors (“CoC”).
The Insolvency and Bankruptcy Board of India notified the Insolvency and Bankruptcy Board of India (Pre-packaged Insolvency Resolution Process) Regulations, 2021 (PPIRP Regulations) on 9^th April, 2021, to enable an operationalisation of PPIRP.[2] By virtue of PPIRP, Companies (MSMEs) can achieve debt restructuring by entering into direct arrangement with the creditors to reorganize the terms of their debt payments.

PPIRP in the Indian framework context is an arrangement where the resolution of a company’s business is negotiated with a buyer before the appointment of an Insolvency Professional. It is a blend of informal and formal mechanisms, with the informal process stretching up to NCLT admission, followed by the existing NCLT supervised process for resolution as specified under the Insolvency and Bankruptcy Code (IBC).

Corporate cum debt restructuring through Pre-Pack - a critical analysis
The entire and seamless dependency on the defaulters viz. promoter of the CD and paving the way for restructuring of the debt by the CD in itself leads to suspicious positions.
Absence of publication of any public announcement or inviting claims from the creditors is another drawback of the said Pre-Pack Process. It envisages the collation of claims by the Resolution Professional (“RP”) with the cooperation of the promoters in default of the Corporate Debtor. Regulation 19 of the Pre-Pack Process Regulations, 2021, provide that RP shall make a public announcement (Form-P9) within 2 days from the date of the commencement of the Pre-Pack Process[3] further the same shall be sent to every creditor listed in Form-P2,[4] sent to Information Utilities[5] and published on the website, if any, of the Corporate Debtor and the Board[6]. However, the regulation doesn’t provide the wider publication and the same is concerned on E-publication of public announcement i.e., Form-P9, which also provides uncertainty of filing of claim by different class of creditors and ultimately leads to legal dispute before the Hon’ble Adjudicating Authority (“AA”).  To make Pre-Pack friendly, the IB Code casts the duty on the Corporate Debtor to extent their full cooperation to the RP on the following subjects:

• Corporate Debtor should be obligated to make available and updated list of outstanding claims, including contingent and future claims to the RP;

• A Debtor in possession model is envisaged under Pre-Pack Process by virtue of which the RP depends on the Promoters of the Corporate Debtor for effective transparency of the Pre-Pack Process;

• Corporate Debtor should also be obligated to draft an information memorandum (IM), based on its books, which may be certified by its Chairman/Managing Director/Managing Partner on behalf of Board of Directors of the CD, handed over to the RP on the day he is appointed by the AA;

As the Swiss challenge method is taken into consideration by creditors for arranging the resolution plan from the selected investors and selecting the best of them to serve as the base plan which may increase the commercial of the plan proposed by defaulters/Promoters of the CD.
However, the unavailability of Resolution Applicants/Investors make the swiss challenge method far-fetch impractical amid pandemic.

Debtor-in-Possession and Creditor-in-Control - Hybrid Approach
While the Pre-Pack Process is carried out by the RP and at the same time the Business is run by the existing management, the RP would make sure the CD is managed during the process in a manner which is not detrimental to the interest of the creditor. As the model is also based on Creditor-in-Control the certain decision of existing management shall require the approval of committee of creditors. The actions enumerated under section 28 of the IB Code shall not be taken solely by the existing management and without the prior approval of the committee of the creditor. For maximisation of the value of the assets of the Corporate Debtor, the RP shall appoint two registered valuer(s) to determine the fair value and liquidation value of the CD to ensure that the Pre-Pack Process is not misused by the existing management of the CD to write off its debts, intending to defraud creditors and at the same time the process envisages the applicability of provisions relating to avoidable transactions to Pre-Pack. Further for effective creditor-in-control the interim finance should be available to the existing management of the CD subject to the approval of the CoC, as it is an essential under section 28 of the IB Code and it shall be included in the Insolvency Resolution Process cost.
For balancing the said Debtor-in-Possession and Creditor-in-Control - Hybrid Approach, the roles and responsibilities of the RP and the CD is demarcated under the IB Code, apart from that, the fastening of the criminal and civil liability with the actions of the existing management of the CD and seek indemnification thereof, shall lead to wider litigation simultaneously when the CD is under Pre-Pack Process and causes huge loss to the assets which are already in stress. The same is questioning the model of the Pre-Pack Process and the objective of the IB Code.

Swiss Challenge Method under Pre-Pack Process[7]   
The IB Code envisages the resolution of the stressed assets through submission of resolution plan by the Corporate Debtor itself and by various other resolution applicants wherein the Corporate Debtor shall submit a base resolution plan to the RP within two days from the date of commencement of PPIRP. The CoC shall invite the resolution plan from prospective resolution applicants keeping in view the base resolution plan and the base resolution plan submitted by the Promoters of the CD shall form the basis for swiss challenge, where the details of the plan are disclosed therewith. Further, the Pre-Pack Process shall offer two optional approaches namely, (i) without swiss challenge but no impairment to Operational Creditors; (ii) With Swiss Challenge inclusive of rights of Operational Creditors and dissenting Financial Creditors, subject to minimum provided under Section 30(2)(b) of the IB Code. The CoC may opt the base resolution plan on its weighted average score in consonance with the applicable provisions of the IB Code or may opt to swiss challenge resolution plan submitted by the other investors / Resolution Applicants. It shall not be necessary that the resolution value shall be higher than the realisable value.[8]

The CoC may decide to close the process with the approval of 66% voting share, present and voting[9], if the CD engages in any activity which has the potential to cause depletion of assets or value to the detriment of the creditors, even the CoC at any time after the PPIRP commencement date but prior to approval of Resolution Plan, may resolve to initiate a CIR Process in respect to the CD by a vote 66%, of the voting shares, if such Corporate Debtor is eligible for CIR Process under Chapter II of the IB Code.[10] Apart from the above-said, the CoC can liquidate the CD with 75% of voting share provided the said decision solely is the commercial consideration of the CoC or if the CoC may deem fit for any other reason. 

• Conclusively, it is observed that in absence of wider publication of public announcement for invitation of claims from all the creditors of the CD causes uncertainty in respect to the resolution of the disputed/undisputed claims and leads to further litigation for already stressed business of the CD.

• The other drawback is the direct approach to Investors/Resolution Applicants by CoC/RP and without publication for invitation to Resolution Applicants, seems restricted, unviable and unfeasible. Further, it also creates an impediment for revitalizing distressed assets and the limited participation of Investors/Resolution Applicants in absence of the publication for inviting them as a bidder qua adoption of secretive approach will have drastic impact and will lead to exponentially rise in cases of CIR Process or Liquidation process and termination of Pre-Pack Process. 

• This secretive approach leads to substantive interference by the Promoters of the CD and defeats the objective of swiss challenge method. Further, the Pre-Pack Process is too oriented for resolution by the CD itself and strict adherence of time period of 90 days with extension of 30 days may leads to unproductive results which tends to initiation of CIR Process or liquidation or closing of Pre-Pack Process without resolution of the debt of the Corporate Debtor/MSME.

Reviewing, revitalizing and restructuring of stressed assets of the CD with this additional tool of PPIRP in a time bound manner is beyond the approach of this framework. Even, there is need of sense of resolution of debt which must be imbued in such measures with the intent to not to allow things to drag further with keeping an eye over the situation emerging from suspension of the Insolvency Laws in the financial sector and it's a matter of concern that in both ways, the framework of Pre-Pack Process will become worthy to spike and maintain the balance in the financial sector.  

This Article has been Compiled by Himanshu Mohinani (Associate), and edited by Deepika Sharma (Senior Associate) You can direct your queries or comments to the author at himanshu@factumlegal.com or deepika@facumlegal.com
Disclaimer:

The contents of this article should not be construed as legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.

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[1] Report of the Sub-Committee of the Insolvency Law Committee on Pre-packaged Insolvency Resolution Process
[2] Insolvency and Bankruptcy Board of India Notification No. IBBI/2021-22/GN/REG071 dated 09.04.2021
[3] Regulation 19(2)(a) of the INSOLVENCY AND BANKRUPTCY BOARD OF INDIA (PRE-PACKAGED INSOLVENCY RESOLUTION PROCESS) REGULATIONS, 2021
[4] Regulation 19(2)(b) of the INSOLVENCY AND BANKRUPTCY BOARD OF INDIA (PRE-PACKAGED INSOLVENCY RESOLUTION PROCESS) REGULATIONS, 2021
[5] Regulation 19(2)(c) of the INSOLVENCY AND BANKRUPTCY BOARD OF INDIA (PRE-PACKAGED INSOLVENCY RESOLUTION PROCESS) REGULATIONS, 2021
[6] Regulation 19(2)(d) of the INSOLVENCY AND BANKRUPTCY BOARD OF INDIA (PRE-PACKAGED INSOLVENCY RESOLUTION PROCESS) REGULATIONS, 2021
[7] Report of the Sub-Committee of the Insolvency Law Committee on Pre-packaged Insolvency Resolution Process
[8] Supreme Court (2020), Maharashtra Seamless Limited Vs. Padmanabhan Venkatesh & Ors., CA Nos. 4967-4968 of 2019
[9] Section 54-K (13) of the Insolvency and Bankruptcy Code, 2016
[10] Section 54-O (1) of the Insolvency and Bankruptcy Code, 2016