PPIRP PROBED: EXAMINING PROGRESS AND CHALLENGES IN MSME INSOLVENCY

Ms. Chinna Aswathy Abraham (Senior Associate- Dispute Resolution Practice)

Ms. Pooja Shree A (Student Intern – Dispute Resolution Practice)

Introduction

This author has previously explored the intricacies of the Pre-Packaged Insolvency Resolution Process (“PPIRP”) during its nascent stages in an article titled “Pre-Packaged Insolvency Resolution Process – The Journey Thus Far“, published on this blog in January 2022. Over two years have lapsed since, and it is imperative to pause and assess the trajectory of these proceedings. This assessment aims to contribute to the ongoing discourse surrounding insolvency frameworks for MSMEs in India, providing a nuanced perspective that considers both the initial expectations and the practical outcomes observed during the intervening period. In doing so, we seek to address fundamental questions surrounding the efficacy of the PPIRP and identify key considerations for its future enhancement.

Revisiting Reflections & Unravelling Subsequent Developments

Resuming our analysis from the point where we left off, it is essential to note that at the time of our previous discussion, three cases— Loon Land Developers Ltd, Krrish Realtech Private Limited, and GCCL Infrastructure and Projects Ltd—had been admitted under PPIRP. We shall briefly examine how each of these proceedings concluded.

In the instance of Krishh Realtech Private Limited (NCLT New Delhi), there was significant outstanding debt with the principal stakeholders being the Financial Creditors (‘FC’s) and Homebuyers. Objections were raised, contending that the PPIRP application was improperly filed, and the requisite consent of the unrelated FCs was not obtained as mandated by the Code. As discussed in the previous article, this matter was appealed before the National Company Law Appellate Tribunal (‘NCLAT’), which affirmed the National Company Law Tribunal’s (‘Adjudicating Authority’s) decision to entertain objections during the admission process. Subsequent to the decision of the NCLAT, the Corporate Debtor (‘CD’) withdrew the PPIRP application on 22.02.2022.

In the case of Loon Land Developers (NCLT-Principal Bench, New Delhi), the CD was admitted into PPIRP on 29.11.21. The CD joined hands with M3M Construction Private Limited to provide a viable Base Resolution Plan which was duly approved by the financial creditors. Nevertheless, it was withdrawn upon application by the CD vide order dated 17.02.2023, and the reasons for such withdrawal have not been enumerated in the said order.

Of the three cases, GCCL Infrastructure and Projects Ltd (NCLT Ahmedabad) is the sole, successful resolution. In GCCL, the CD was admitted to PPIRP on 14.09.2021. The Committee of Creditors (‘CoC’) was constituted with the sole FC, Guardian Finance Private Limited, having 100% of the voting power. The Base Resolution Plan which provided for 100% of the admitted claims to be paid was unanimously approved by the CoC. The plan also provided for the management to vest with the CD itself, whereby the Director of GCCL Infrastructure and Projects Limited would act as the CEO. The amalgamation of the TV undertaking of Shreyarth Aaspas Limited (Demerged Company) with the CD (Transferee Company) was also proposed by way of a Composite scheme of Demerger and Amalgamation. The Plan was approved by the Adjudicating Authority, on 05.09.2023 nearly two years after its admission. Despite the delays, the final Resolution Plan aligns with the interests of all stakeholders, representing an optimal outcome under the PPIRP framework where the CD retains control, creditors achieve complete recovery expeditiously, and the demerger facilitates the CD’s continuity as a going concern.

Analysis of Cases so far

As on date, 11 cases have been initiated/filed under the PPIRP framework. Of these, 2 have been withdrawn by the CD itself, for reasons not known to the authors. The petition filed under Section 54C faced dismissal on two occasions. In the CHD Developers case (NCLT New Delhi), the Adjudicating Authority determined that precedence should be given to the pending Section 7 application filed prior to the enactment of Part III-A of the IBC, 2016 and dismissed the application for initiation of PPIRP. Meanwhile, in the Garodia Chemicals case (NCLT Mumbai), the Adjudicating Authority discerned that the initiation of proceedings aimed to circumvent the SEBI Takeover Regulations, leading to the rejection of the petition. Among the remaining seven cases, five have been successfully resolved, while the resolution of the remaining two is currently pending after admission.

Table: PPIRP cases initiated under the IBC framework.

S.No.	Name	Industry	Date of Admission	Date of Resolution	Time taken for Resolution
RESOLVED
1.	Amrit India (NCLT New Delhi)	Trading and Consultancy	28.11.22	03.05.2023	156 days
2.	GCCL Infrastructure and Projects (NCLT Ahmedabad)	Construction/Real Estate	14.09.21	05.09.2023	721 days
3.	Enn Tee International Limited (NCLT New Delhi)	Manufacture of apparel & supply of yarn	10.10.22	19.10.2023	374 days
4.	Shree Rajasthan Syntex Limited (NCLT Jaipur)	Manufacture of yarn	19.04.23	22.08.2023	125 days
5.	Sudal Industries Limited (NCLT Mumbai)	Manufacture of aluminium extrusions and base alloys	20.04.23	10.08.2023	112 days
WITHDRAWN
6.	Loon Land Developers Limited (NCLT New Delhi)	Real Estate	29.11.21	NA	NA
7.	Krrish Realtech (NCLT New Delhi)	Real Estate	NA	NA	NA
DISMISSED/REJECTED
8.	CHD Developers Limited (NCLT New Delhi)	Real Estate	NA	NA	NA
9.	Garodia Chemicals Limited (NCLT Mumbai)	Manufacturing and dealing dyes and chemicals, chemical products and by products.	NA	NA	NA
ADMITTED AND PENDING RESOLUTION
10.	Mudraa Lifespaces Private Limited (NCLT Mumbai)	Contractors, builders, town planners, integrated township development & construction, etc.	06.12.2023	NA	NA
11.	Shreemati Fashions Private Limited (NCLT Kolkata)	Apparel	05.01.2024	N/A	NA

Under the PPIRP framework, once admitted, the process is to be completed within 120 days. Adhering to this is critical due to the time sensitive nature of the process- loss of time may result in forfeiting the advantages inherent in the process, as the Base Resolution Plan (‘BRP’) submitted by the CD is time-specific and tailored to address the companies needs at that juncture. Prolonging the process risks rendering the plan outdated, potentially leading to its rejection. Of the 5 cases that have been successfully resolved so far, there have been undue delays in two. Such temporal setbacks can be attributed to, both, the procedural delays in the judicial process and other creditor-related delays.

The case of GCCL is one that is symptomatic of the delay in approving the resolution plan. The application was filed on 06.07.2021 and thereafter listed for first hearing on 06.09.2021. The Adjudicating Authority sought specific clarifications and subsequently admitted the petition on 14.09.2021; however, the case encountered considerable delays thereafter. There have been a total of 18 adjournments, of which 14 were due to paucity of time, or absence of the regular bench. As a result, the process took nearly 800 days. Delays stemming from judicial infrastructure deficiencies could be alleviated through the implementation of remedial measures, including prioritized scrutiny of pre-pack cases and the adoption of a checklist-based approach. Additionally, with an increased caseload and growing familiarity with the process, the Hon’ble Members are anticipated to require fewer clarifications and exhibit reduced hesitancy. Consequently, the disposal time for cases is likely to decrease.

The case of Enn Tee International Limited serves as an illustration of delays attributable to creditors and protracted negotiation periods. The case was admitted on 10.10.2022 and the resolution plan was approved nearly a year later. It observed that between 28.10.2022 and 18.05.2023, the CoC convened on five occasions and engaged in deliberations. Thereafter, the 29A Affidavit was filed on 29.08.2023. Upon admission, it was observed that the case ought to have been promptly transitioned to the Stressed Asset Wing of the relevant bank; however, delays were encountered in effecting this transfer. Additionally, the negotiation process conducted at the Stressed Asset Wing, with its superior authority, was also time consuming. Keeping such delays in mind, the Adjudicating Authority suggested that the moment an application under Section 54(C) is filed, the Stressed Assets Wing of the concerned Bank should take over the case for further negotiation to avoid delays and keep up the timelines.      

Notwithstanding, when considering the successful resolutions achieved under the PPIRP framework, it is reasonable to characterize these two cases of delays as anomalies. By and large, it is evident that the Adjudicating Authority and other stakeholders are dedicated to expeditious resolution processes. However, perplexingly, the number of PPIRP filings remain abysmally low.

Possible Reasons for Limited Success

1. Financial Creditors

A distinguishing feature of the PPIRP is that it is a “debtor-in possession” insolvency resolution process, however this may lead to difficulty in ensuring transparency as there will be gaps in information availability. Further, inadequate marketing of pre-pack sales due to its inherent opacity in the process may hinder price discovery and lead to less money to the creditors. This may lead to bankers preferring a CIRP to a PPIRP, as the former has the scope to be more competitive.

Moreover, loans extended to MSMEs typically constitute small to medium ticket sizes and are sanctioned by lower-ranking bank officials. PPIRP involves creditors taking voluntary haircuts without being recompensated, as in a traditional restructuring. Therefore, these officials, apprehensive about accountability from both internal and external entities, display reluctance in authorizing PPIRPs. Consequently, obtaining approval from banks becomes a prolonged and cumbersome procedure. Decisions related to credit entail risk assessments at a specific point in time, necessitating insulation of bank officials from subsequent accountabilities for bona fide decisions made concerning Stressed/Non-Performing Asset accounts.

According to Section 54A(3), the PPIRP process can be commenced only if unrelated financial creditors with 66% votes or more approve the application initiating PPIRP. This requirement gives rise to two distinct challenges. Firstly, the predominant family ownership structure of MSMEs [1], coupled with their substantial dependence on credit from related parties, renders the mandatory 66% approval from unrelated parties burdensome for the CD. Secondly, in accordance with Section 54K(4), the CoC is obligated to solicit resolution plans from prospective resolution applicants and prioritize value maximization, in those instances where the BRP submitted by the CD proposes to impair the debts of OCs.

Consequently, CD’s are implicitly compelled to include terms safeguarding the interests of OCs. Therefore, FC’s may have to face reductions in their claims or find that their claims are not accorded the same level of importance. This fosters a sceptical attitude among FCs proposing reductions to their debts, while Operational Creditors remain seemingly unaffected, thereby exacerbating the challenge of attaining the required 66 per cent threshold as stipulated in Section 54A (3), [2]. Lowering this threshold to 51per cent would not only align with the objectives of the Code but also enhance the feasibility for CDs to pursue this option.

2. Corporate Debtor

Another possible reason for the lack of popularity of PPIRP could be the dismal levels of awareness about the process amongst the key stakeholders [3] Moreover, even those Corporate Debtors and Promoters that are aware of the option, may be wary to opt in for a PPIRP, due to a fear of loss of control over the unit in the eventual departure from the Base Resolution Plan resulting in Best Alternative Plan (Swiss Challenge Method). Further, under Section 54O, the CoC can, at any point after the pre-packaged insolvency commencement date but before the approval of a resolution plan, by a vote of 66 per cent of the voting shares, decide to commence a CIRP. This creates a looming risk for the CD, as it implies the possibility of losing control over the enterprise at any juncture during PPIRP, thereby acting as a deterrent.

Conclusion

It is noteworthy that in the five successful resolutions under the PPIRP framework, there have been no haircuts for operational creditors. This is a significant observation, particularly when compared to the customary side-lining and diminished cuts experienced by operational creditors in a CIRPs.   Despite the highly aggressive timelines inherent to PPIRP in relation to CIRP, recent cases have predominantly managed to meet these timelines. In view of these facts, the commendable performance of the PPIRP is evident. Nevertheless, while the PPIRP demonstrates a degree of success, it is important to acknowledge that this success remains notably limited. Given that the PPIRP is a voluntary exercise undertaken by different stakeholders, it becomes imperative to proactively address apprehensions and alleviate any concerns. Additionally, fostering awareness about the framework’s existence and highlighting recent success stories in resolutions are also essential to enhance its popularity.

End Notes

1. J. Jayaram, M. Dixit, J. Motwani, “Supply chain management capability of small and medium sized family businesses in India: A multiple case study approach”, International Journal of Production Economics (2014).
2. Vikram Kumar, “Pre-Pack Insolvency Resolution Process (PPIRP) for Real Estate Developers: Challenges and Road Ahead”, THE RESOLUTION PROFESSIONAL (July, 2022).
3. Alekha Charan Rout, “PRE-PACKAGED INSOLVENCY RESOLUTION PROCESS (PPIRP) UNDER THE INSOLVENCY & BANKRUPTCY CODE (IBC), 2016: WHY A NON-STARTER?”, The Management Accountant (October 2022).