Pre-Packaged Insolvency Resolution Process – The JOURNEY thus far

Ms.Chinna Aswathy Abraham

Associate, Litigation & Arbitration Practice

Business rescue is commonly achieved by sale of the company’s assets while keeping it a going concern, in an attempt to generate more value, as opposed to selling the assets in piecemeal. This is precisely what a pre-packaged insolvency resolution mechanism seeks to achieve. In a pre-pack, “a troubled company and its creditors negotiate an agreement prior to statutory administration procedures, which allows these statutory procedures to be carried out at greater speed.”(1) “It is commonly seen as a hybrid method of corporate rescue, as it combines the advantages of private restructuring with some of the characteristics of the formal procedure.”(2)

The Ministry of Corporate Affairs had set-up the Insolvency Law Sub-Committee (‘Sub-Committee’) to prepare a report on the prospects of implementing such a Pre-Packaged Insolvency Resolution Process (‘PIRP’) in India. “The report identified 3 principles which any pre-pack ought to abide by; which are as follows:

• the basic structure of the Insolvency & Bankruptcy Code, 2016 (‘IBC’) should be retained;
• there should be no compromise of rights of any party; and
• the framework should have adequate checks and balances to prevent any abuse.”(3)

It was also decided that any pre-pack framework to be launched in India, would have to be implemented in a phased manner, starting with small debtors or others with no complications in their debt structure. Hence, on 11.08.2021 vide the Insolvency & Bankruptcy Code (Amendment) Act, 2021, Chapter III-A was inserted into the IBC which introduced a PIRP for Micro, Small and Medium Enterprises (‘MSMEs’).

Except where specific provisions have been made in respect of PIRP, most of other provisions relating to the Corporate Insolvency Resolution Process (‘CIRP’) apply to PIRP as well. Now that it’s been five months since the initiation of the PIRP in India, let us analyse how the process has fared thus far.

The present pre-pack framework is such that an application under Section.54C can be filed by the Corporate Debtor even for default arising prior to the date of promulgation of the Ordinance, if the same is above Rs.10lakhs and below Rs.1 crore, as is evident from the first case of PIRP in India –GCCL Infrastructure and Projects Ltd (4).  The Hon’ble NCLT, Ahmedabad Bench was pleased to admit the Corporate Debtor to PIRP for a default amount of Rs.54, 16,250/-. The date of default was 31.12.2020.

The order also recorded that the Corporate Debtor had filed an Affidavit regarding its eligibility under Section.29A, thus complying with the provisions of Section.54A (2)(d) of the Code. While there is no doubt that a Corporate Debtor is eligible to submit a Resolution Plan for itself under the PIRP framework, Section.29A(c) of the Code effectively prohibits promoters’ and directors’ of the Corporate Debtor from submitting resolution plans. However, Section 240A exempts promoters/directors of MSMEs -both under CIRP and PIRP -from the prohibitions imposed by Section 29A(c). This seems to be largely in line with principles (i) and (ii) of the Sub-Committee as aforementioned.

Following suit, the Hon’ble NCLT New Delhi Bench, admitted Loon Land Developers Ltd (5) to the PIRP in November, 2021. As provided for in the pre-pack framework, the management of the Corporate Debtor still vests with the Board of Directors. It will be interesting to observe how the strict timeline of 120 days for completion of the PIRP will be adhered to in these cases.

This requirement to complete the PIRP in a time bound manner was pointed out by the Appellant Corporate Debtor in the case of Krrish Realtech Private Limited (6), before the Hon’ble NCLAT. In this case certain Home-Buyers raised objections to the Application to initiate PIRP, stating that the said Application was not filed in accordance with the requirements of the Act. The Hon’ble NCLT permitted the said Objectors to file their objections, while also granting time to the Corporate Debtor to file replies. On appeal, it was argued on behalf of the Corporate Debtor that the Hon’ble NCLT had no jurisdiction to grant any time to Objectors to file a reply. It was argued that under the PIRP, no opportunity to oppose was contemplated to any person, including the Objectors/Financial Creditors prior to the admission of the Application- as the PIRP is a time-bound process. While upholding the order of the Hon’ble NCLT, the Appellate Authority recorded that no prejudice was caused to the Appellant Corporate Debtor because Objectors were given time to file objections, as the Appellant was also given opportunity to file its replies. The Hon’ble NCLAT observed that as Home-Buyer/Financial Creditors with huge stakes, their anxiety would have to be appeased by ensuring that the PIRP is resorted to in accordance with the procedure prescribed in law. Whether or not such objections carried merit, was of course to be decided by the Hon’ble NCLT.

This observation by the Hon’ble NCLAT seems to be in line with principle (iii) laid down by the Sub-Committee, to make certain that the PIRP does not compromise on the rights of any persons, “by ensuring that there are adequate check and balances to prevent the unbridled use of pre-packs by debtor companies, as a means of circumventing the CIRP.”(7)

While it is still early to draw concrete conclusions, it does appear as though what the Insolvency Law Sub-Committee had laid down as the core principles of the process, have been incorporated into the pre-pack framework and upheld by the judiciary.

This of course does not mean the procedure contemplated under the Code is flawless. For instance, under Section 11A, if an Application under section 54C is filed within fourteen days of filing of any application to initiate CIRP, in respect of the same corporate debtor, then the Adjudicating Authority shall first dispose of the Application under section 54C. While this seems just and fair in theory, practically it is almost impossible to complete all the formalities contemplated under the Code in just fourteen days-like negotiating a base plan with the creditors and thereafter obtaining the consent of 75% of the members and that of at least 66% of the unrelated financial creditors. However since under the Code, the Hon’ble NCLT is to admit or reject an Application for initiation of CIRP within fourteen days, the law-makers appear to have had their hands tied.

This makes one wonder if ensuring that the existing insolvency resolution framework is conducive to the PIRP is a tougher task than expected.

Reference:

1. Vanessa Finch, Corporate Insolvency Law -Perspectives and Principles (2nd edn, Cambridge University Press 2009) 453.
2. Bo Xie, Comparative Insolvency Law: The Pre-Pack Approach in Corporate Rescue (Edward Elgar Publishing 2016).
3. Report of the Sub-Committee of the Insolvency Law Committee on Pre-packaged Insolvency Resolution Process (Ministry of Corporate Affair) <https://ibbi.gov.in/uploads/whatsnew/34f5c5b6fb00a97dc4ab752a798d9ce3.pdf>.
4. GCCL Infrastructure and Project Ltd., NCLT Ahmedabad Bench,  CP(IB)/116/54/NCLT/AHM/2021.
5. Loon Land Developers Ltd, NCLT Delhi-Principal Bench, (IB)-(PP)-03(PB)-2021.
6. Krrish Realtech Pvt Ltd, NCLAT, Delhi, Company Appeal (AT)(Ins) Nos. 1008,1009 & 1010 of 202.
7. Sanjana Rao, ‘Insolvency Procedures – Investigating the Pre-Pack Paradigm in India’ (2019) 10 Law Review Government Law College 69.