[Abhigyan Tripathi and Anmol Mahajan are third-year student at Rajiv Gandhi National University of Law, Punjab]
Pre-packaged insolvency resolution process (“PPIRP”) is a form of corporate rescue that aims at establishing an equilibrium between the interests of creditors and the business and assets of the corporate debtor (“CD”) by ensuring a smooth transition of aforementioned business and assets. The Insolvency and Bankruptcy Code (IBC) takes into account the importance of rescuing a CD.[i] PPIRP is an insolvency procedure wherein a CD facilitates a deal for selling its assets to a buyer prior to the appointment of resolution professionals (“RP”). A RP is responsible for overseeing the management of the CD facilitate the sale of its assets. To further the trend of insolvency reforms, a sub-committee headed by MS Sahoo was established by the Insolvency Law Committee to recommend a framework to regulate PPIRP.[ii] On the basis of this sub-committee report, the President promulgated the IBC (Amendment) Ordinance, 2021. Therefore, it is essential to engage in a cross-jurisdictional analysis of the aforementioned change in law and test its efficacy w.r.t. Indian market.
Analysing the Sahoo report’s reliance on UK’s pre-package regulation
Following the recommendations of the Cork Report[iii], the United Kingdom introduced its first insolvency Act in 1986. The Insolvency Act, 1986 laid the foundation of ‘corporate rescue’[iv] in the country by invoking two procedures, namely the company voluntary arrangement and the company administration order. The 1986 Act was, eventually, revised and enhanced by Part 10 of the Enterprise Act, 2002. Thus, if the 1986 Act was the first wave of corporate rescue in the insolvency Act, the Enterprise Act, 2002[v] can be considered the second wave.. However, the 1986 Act as well as the Enterprise Act, 2002 do not make any mention of pre-pack insolvency in the bare text of the legislation. In order to address, the ambiguity around pre-pack insolvency in the United Kingdom, Ms. Teresa Graham conducted an independent review of the concept.[vi] The findings of this review were subsequently compiled and named ‘The Graham Review of 2014’.[vii]
The review emphasized on the need for pre-pack insolvency but at the same time expressed concerns with regard to the lack of transparency around pre-pack sales for unsecured creditors.[viii] To counter these problems, the review also enumerated a set of voluntary measures. These included setting up of a pre-pack pool. A pre pack pool is a group of experienced business people who scrutinize independent pre-packs and suggest improvements to marketing and valuation requirements and supply of information to creditors. In case the pre-pack member issues a positive statement, it would also be referred to in the SIP16 statement.[ix] If a member of the pre-pack pool issues a negative statement on the pre-pack sale, the deal can still take place, though the comment will be recorded in the SIP16 comment.[x] SIP16 statement is a disclosure made by the Insolvency Practitioner to the creditors explaining and justifying as to why a pre-packaged sale was undertaken. The SIP adopted these voluntary measures in November, 2015.
Understanding the interplay between the United States’ insolvency framework and the Sahoo Report
The Bankruptcy Code of US provides for three different forms of pre-packaged insolvency deals. The Indian framework has blended the qualities of both the US as well as the UK PPIRP regulations. For the purposes of this paper, it would be pertinent to focus on the manner of pre-packaged deals envisaged by the US model. The pre-plan deal under section 363[xi] of the Bankruptcy Code is quite similar to the UK model and the latest IBC (Amendment) Ordinance, 2021. The first of such striking features is that of debtor in possession methodology which has two implications:
● First, such an informal process ensures that the business stays a going concern and does not undergo unnecessary asset value depreciation.
● Second, unfortunately, an aspect of opaqueness creeps into the entire restructuring process. One of the most commonly observed phenomena is that of ‘phoenixing’ wherein a corporate entity keeps on transferring only its business and not its debts to a series of new companies.[xii]
The analogous difference between the two jurisdictions, i.e., the US and India is that of perspective i.e., which stakeholder can actually initiate such an out of court process. The latest Ordinance dealing with the PPIRP option in case of default by MSMEs provides that the same can be initiated voluntarily only by the CD after seeking approval from the non-related financial creditors. The US pre-plan option however can be exercised by both the financial creditors as well as the corporate applicant.
The other stark difference between the US and Indian frameworks is the statutory guidelines which provide definitive methodologies for the RP.[xiii] The American courts have developed their own guidelines which the US Trustee (similar to an IRP in India and an Administrator in the UK) is required to follow while overseeing the restructuring discussions between the CD and the financial creditors. The United States Bankruptcy Court for the Southern District of New York opined that it was essential to ensure uniformity and unnecessary litigation and hence promulgated SDNY Guidelines to administer prepackaged Chapter 11 insolvency proceedings.[xiv] The Insolvency and Bankruptcy Board has, however, come up with the Pre-packaged Insolvency Resolution Process Regulations, 2021 to deal with various aspects of PPIRP such as information memorandum, meetings of the committee of creditors (“COC”), the manner of vesting management of the CD with the RP and so on.
Discussion on the definite procedure of PPIRP
The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021[xv] was promulgated to regulate PPIRP with respect to MSMEs. The manner for PPIRP as provided by the newly inserted Chapter IIIA is as follows:
➔ An application for initiating a PPIRP may be made before the NCLT u/s 54A(1) by a CD which falls under the category of MSME.
➔ Such an application may be filed only after the passing of a special resolution by the majority of directors/three-fourth partners and approval from not less than 66% of non-related financial creditors by value.
➔ The NCLT while adjudicating upon such application is supposed to accept or reject it within 14 days. If the NCLT accepts such an application, the proceedings are required to be completed within 120 days of acceptance while the RP has to submit the approved base resolution plan within 90 days to the NCLT. If the NCLT finds inadequacies in the application, before rejection, it is required to notify the CD about the same within 7 days of receipt.
➔ Within two days of PPIRP commencement, the CD is required to submit the list of claims and the preliminary information memorandum to the RP.
➔ The RP is required to submit the base resolution plan within two days as well as confirm the list of claims submitted by the CD, inform the creditors about the said claims, maintain a list of updated claims, monitor the affairs of the CD, inform the COC of any breach by the CD, constitute and convene the COC and prepare an information memorandum till the PPIRP ends. The constitution of the COC needs to be done within 7 days of receipt of updated information and list of claims.
➔ The approval of a resolution plan requires a 66% vote by value in its favour, post which it is submitted to the NCLT for consideration. In case of any impairment by operational creditors to the original plan, the RP shall invite prospective applicants to submit an alternative resolution plan. If no resolution plans are approved, the RP files for termination of PPIRP. On the other hand, If the NCLT is satisfied that the resolution plan is satisfactory, it will pass an order to approve the same.
➔ Section 54H contains the essence of PPIRP, i.e., “debtor in possession”. It provides that during PPIRP, the management of CD shall rest with the directors/partners who are required to strive for preserving the value of business and maintain it as a going concern.[xvi]
➔ If the COC at any point during PPIRP resolves, by at least a 66% vote, to vest the control and management of the CD with the RP, he shall apply for the same to the NCLT.
➔ It is important to note that if the COC, at any point after the commencement date but before the approval of the resolution plan, by a 66% majority may resolve to initiate a CIRP with respect to the CD if it is eligible for the same.
From the aforementioned discussion with reference to the definitive procedure of PPIRP, it becomes highly evident that it can facilitate business continuity, efficiency and cost effectiveness during the pendency of insolvency proceedings. Since the management of the CD continues to rest with the Board of Directors/Partners, who are required to uphold the ‘going concern’ principle in consultation with the stakeholders, the same would result in maximisation of the assets’ value.
The Indian Insolvency Regime is still at its nascent stage. . The past year was marred by the COVID-19 pandemic, wherein virtually all insolvency proceedings were put on a hold by the Government which makes the introduction of pre-pack insolvency nothing short of a ‘breath of fresh air’. Concerns surrounding transparency in the process have not yet been addressed, but the analysis of the UK and US model of pre-pack above gives valuable input. The introduction of a pre-pack pool as seen in the UK regime could be a game changer in this regard. Not only will this make the process more transparent but will also help in the corporate rescue of the debtor.
Even though the introduction of such an informal process was done in context of the COVID-19 pandemic, the expedited nature of proceedings can surely have a highly positive impact when normalcy returns. However, to ensure maximum returns from the PPIRP framework, it requires a great degree of transparency on part of the CD to ensure that certain classes of creditors do not engage in backdoor negotiatio