PRE-PACK: AN EMERGING PANACEA FOR CIRP?
INTRODUCTION
Insolvency and Bankruptcy Code 2016 , was promulgated to fight snowballing cases of bad loans and corporate insolvency. The aim of the act was to establish a consolidated framework for insolvency resolution of corporate entities. The code provides for Corporate Insolvency and Resolution Process under chapter 2 through which insolvency resolution of corporate entities take place. However, in many instances CIRP has failed the objective of the code with perennial delays in the resolution of insolvency. To save MSMEs from this delay and quick action on their insolvency, government brought a unique insolvency resolution process in picture. Pre-Pack Insolvency resolution procedure (PPIRP) was envisaged by the government to resolve the insolvency of MSMEs whose outstanding debt exceeded 10 lakh rupees. This procedure has been prevalent in many developed economies. The idea of the PPIRP is to make the insolvency resolution procedure more efficient. It provides for out of court settlement for debtors and creditors thus giving an opportunity to both the parties to avoid the cumbersome litigation process. The motive behind the Insolvency and Bankruptcy code was to avoid delays in insolvency resolution to facilitate ease of doing business in the country. However, the procedure provided in the code i.e., CIRP fails to fulfill the main objective of the legislation. Government’s reluctance to notify the PPIRP for all the corporate entities lack any logical explanation.
[Image Source:Freepic]
WHAT IS PPIRP?
Pre pack is a unique kind of Insolvency Resolution Procedure which involves out of court settlement for the parties and aims to cut down on unnecessary delays in resolution of Insolvency. The procedure is considered to be more efficient than the original CIRP process. Pre-Pack has been functional in many developed economies as the process is in tandem with the contemporary time. In this fast-paced economy it is important to resolve the bad loans and restructure a distressed firm in limited times. The idea of involving labyrinth of litigation process in restructuring of a corporate entity defeats the purpose of Insolvency and Bankruptcy Code. The pre pack brings in an innovative and hybrid method which incorporates the virtues of out of court settlement and formal process of resolving insolvency. It encourages the parties to resolve the dispute with minimum assistance from the state. Under the PPIRP before the commencement of formal insolvency procedure the parties are allowed to discuss the resolution of insolvency, repayment of debt and value maximization of the distressed entity informally. Furthermore, under the PPIRP debtor who is acquainted with the nuances of the firm is in the control of the business unlike the resolution professional appointed by the Adjucating Authority (AA) as envisaged in the CIRP. It shifts the culture of the “creditor in control” to “debtor in possession” regime. These features of the PPIRP make the resolution more efficient at the same time keeping the interest of both the parties at the center. The time taken to resolve the insolvency through this process is substantially less since in informal process parties are more likely to mutually agree to an efficient plan.
The PPIRP process is a time bound and cost-effective method under which a base resolution plan has to be submitted to the Resolution Professional and the Committee of the Creditors (Coc) within 2 days of commencement of the PPIRP. After the submission of the base plan CoC may approve the plan and refer it to the Adjucating Authority for approval. In case, the CoC is not satisfied with the resolution plan then the resolution professional can invite plans from the third parties through Swiss challenge process. The Committee of Creditors can further analyse the resolution plans and approve any of them with 66% of the voting within 90 days since commencement of the PPIRP. After the approval, the plan is referred to NCLT which checks if the resolution plan is in compliant with the criteria mentioned in the Section 30 of the IBC code. NCLT has to give final approval to the plan within 30 days. It is envisaged that the process is completed within the 120 days unlike the CIRP where the time is subject to extension till 270 days. In case the resolution plan is accepted by the COC then the process becomes all the more efficient because there would not be any unnecessary invitation of resolution plans through Swiss challenge by the third parties.
WHY PPIRP?
The primary idea behind the induction of Insolvency and Bankruptcy Code was to facilitate timely resolution of insolvency and strengthen the business environment of the country. Corporate Insolvency Resolution Process (CIRP) is the resolution process prescribed by the IBC to resolve the corporate insolvency. Section 6 of the code provide for initiation of CIRP by the financial creditor, operational creditor or the corporate debtor himself. Section 12(1) says that the process of resolution should be completed within 180 days which can be extended till 330 days. On the other hand, PPIRP has a much stricter timeline of 120 days. The problem with CIRP is the leniency related to the deadlines. There are many cases where the deadline of 330 days has been breached due to which the whole purpose of the process is defeated. Parties caught in vexatious litigation process is a usual practice in the CIRP. In fact, the Supreme Court has warned that the present insolvency regime may meet similar fate like past regimes due to perennial judicial delays. According to Insolvency and Bankruptcy Board of India 75% of the ongoing insolvency resolution cases had exceeded 270 days and took on average 400 days for resolution last year .
Recently, in the case of Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Ltd , it was highlighted how the parties suffer due to unaffordable delays in the insolvency proceedings. In the above case question of law before the Supreme Court was “whether a resolution plan approved by Committee of Creditors can be withdrawn or not” Supreme Court conclusively held that no such request of withdrawal can be entertained as it would be inequitable for the parties. Another problem with the CIRP is that once the process is initiated the command of the firm is handed over to the resolution professional in order to maximise the assets. However, it is believed by many industry experts that the debtor who is acquainted with the nuances of the business should be in a better position to handle the firm.
CONCLUSION
With changing times, it is pertinent that we also take steps towards adapting for better. IBC is a new legislation and it would further evolve and take a more concrete shape with changing jurisprudence. The idea of the legislation is to efficiently handle the insolvency cases. PPIRP can prove to be a huge turnaround from the archaic and traditional resolution process. The PPIRP is a tried and tested resolution process in the other countries. Its flexible nature would be more helpful in achieving the purpose of the legislation. CIRP on other hand is fraught with delays and inefficiency.
The Supreme Court further complicating the matter for CIRP held recently in the case of Vidarbha industries limited v. Axis Bank that section 7(5)(a) confers only discretionary power on Adjucating Authority to admit application by Financial Creditor. According to SC judgment the two tests i.e., existence of debt and evidence of default upheld by SC in Swiss Ribbons case are not sufficient for confirmation of application for CIRP and the financial condition of borrower should also be taken into consideration. In simple words, even the application process for CIRP has become subjective a consequential change from earlier objective criteria. The scope of litigation in the process would always lead to different interpretations of the code which may jeopardize the efficiency of the process just like the Vidarbha verdict. Updating CIRP is the need of hour and Pre-Pack is the best option we have got. It is relevant that the nascent procedure be given the attention and brought into the main stream of the corporate insolvency regime.
Author: Nishant Kumar, Hidayatullah National Law University, in case of any queries please contact/write back to us at support@ipandlegalfilings.com or IP & Legal Filing.
