The Insolvency and Bankruptcy Code, 2016 [‘IBC’] was introduced with an aim to consolidate the resolution process for corporate entities under one legal framework. The objective was to carry out the insolvency and liquidation process in a time bound manner in order to provide an avenue for relief not only to the financial creditors but also keep the corporate debtor as a going concern. It was a laudable initiative to strengthen the economy, maximise the value of the assets, secure the interests of the creditors and keep the spirit of entrepreneurship alive in the commercial market.
However, the advent of COVID-19 brought a wave of unprecedented financial stress and panic amongst corporate debtors and financial creditors. The Government was compelled to step in and introduce reformatory measures for stability and security of the debtors and creditors. Subsequently, the IBC was also amended to not only introduce Section 10A but also the novel method of Pre-Packaged Insolvency Resolution Process [‘PPIRP’]. Where on one hand, Section 10A provided reliefs to all corporate entities by putting an embargo on initiation of CIRP arising out of defaults during the COVID-19 period, on the other hand the implementation of PPIRP focused on small businesses such as Micro, Small and Medium Enterprises.
The introduction of PPIRP was necessitated in view of the RBI Financial Stability Report which noted that the MSME sector was suffering due to lack of cash flows, low demand, lack of man power and capital which could have led to prolonged stress and large-scale permanent closure of units and consequent impact upon the employment. Given the issues being faced by MSMEs, a special insolvency framework was intended to be notified by virtue of Section 240A of the IBC. Accordingly, the Insolvency Law Committee [‘ILC’] was constituted and tasked with the agenda to explore an insolvency mechanism which catered to the needs of the MSMEs.
The ILC noted that there was a need for a simpler, low-cost and time bound process which comprised of effective measures to facilitate participation of both, the debtor and creditor, by providing a hybrid and informal mechanism. Thus, the system of PPIRP was introduced to provide a speedier, simpler, low-cost and effective mechanism for MSMEs to reform their financial affairs in consonance with the needs of the business and the creditors. At the same time, it also presented a better alternative to other options such as arriving at one-time settlement by banks. Thereafter, the Legislature amended the IBC via Insolvency and Bankruptcy Code (Amendment) Act, 2021 along with the Insolvency and Bankruptcy (Pre-packaged Insolvency Resolution Process) Rules, 2021 to introduce the PPIRP.
The system of PPIRP is in contradistinction to the Corporate Insolvency Resolution Process [‘CIRP’]. Although the corporate debtor is bound to fulfil the eligibility requirements laid down under Section 29A of the IBC, however, unlike CIRP, the PPIRP adheres to the ‘debtor in possession’ wherein the management of corporate debtor retains control under the scheme of PPIRP as the corporate debtor and unrelated financial or operational creditor enter into consultations to formulate a resolution plan and resolve the financial woes. The said unrelated financial or operational creditors are financial or operational creditors who are not related parties of the Corporate Debtor.
It enables corporate applicant to pursue PPIRP if there is a minimum default of INR 10 lakhs, which may also arise from multiple accounts aggregating to meet the minimum threshold, however, PPIRP is inapplicable for defaults exceeding INR 1 crores. However, PPIRP can only be triggered if not only the unrelated financial creditors approve the appointment of IP as RP while providing the approval under Sections 54A(2)(e) and 54A(3) of the IBC but the majority of director/partners of Corporate Debtor shall make a declaration via a special resolution for filing of application to initiate PPIRP. The Corporate Debtor shall also prepare a base resolution plan which adheres to the criteria provided under Section 54K of the IBC.
The Legislature in its wisdom also proceeded to enforce the bar that the debtor shall not have undergone PPIRP and CIRP during the 3 years preceding the initiation date or is not required to be liquidated under the directions of an order pronounced under Section 33 of the IBC.
In order to complete the PPIRP within 120 days from the date of commencement, the MSMEs are required to engage the service of an Insolvency Professional [‘IP’]. The IP has a dual role who acts as the advisor to the corporate debtor till the filing of application to the Adjudicating Authority and thereafter the IP acts as a Resolution Professional as appointed by the Financial Creditors.
The framework under PPIRP endows a paramount significance to the consensus with the unrelated financial creditors as it is only by their approval that the PPIRP is put into operation. A major hurdle for the same is two-fold as the creditors who may be receiving a haircut for their claims under the base resolution plan may not provide approval for the initiation of the process altogether. Although only 66% of the vote from the creditors is required but the entire process may end up in a limbo if the objections are preferred before the Ld. Tribunals. The timely resolution is forsaken during such litigation process which defeats the purpose of initiating PPIRP. Further, an absence of a moratorium during the PPIRP also exposes the corporate debtor to ensuing litigations at various other fora which results in endangering the resolution plan proposed by the corporate debtor.
Thus, it is essential that the framework of PPIRP is re-assessed in order to streamline it with the variety of issues being faced by the stakeholders. Such analysis and improvements will further aid in effective implementation of PPIRP for benefit of the MSMEs.