This article is written by Aditee Arya, pursuing Certificate Course in National Company Law Tribunal Litigation from LawSikho. The article has been edited by Aatima Bhatia (Associate, LawSikho) and Ruchika Mohapatra (Associate, LawSikho).
Table of Contents
Introduction
The pre-pack insolvency resolution process (hereinafter PIRP) is prearrangement carried out by the promoters of the company without involving the resolution professional. To carry out PIRP the corporate debtor along with its creditors whether secured or unsecured or operational creditor whoever will together come up with a solution for resolving the insolvency of the corporate debtor and for which they do not apply to the NCLT for appointing an insolvency professional. So, this is an out of court arrangement by the debtor and the creditors, only, without involving court or insolvency professionals, but they shall follow the basic procedures of the code such as securing the interests of the creditors, such that PIRP does not become a way of escape for the corporate debtors by fraudulently selling the stressed assets of the company to other organization before entering into IRP in order to provide an incorrect valuation of the assets of the company during the IRP to defraud the creditors and they shall have an automatic moratorium period just like in IRP.
The article will discuss what is pre-pack insolvency and how dissimilar it is from an insolvency resolution process as per the provisions provided under codes of different countries along with taking a look at the trends of cases that are applied for insolvency under the code in India and how many of them are either resolved, withdrawn or stay pending will be looked upon. The focal point of the article lies in the various provisions concerning pre-packaged insolvency of different countries like the UK, US, Singapore, South- Korea etc. The article will briefly analyse the provisions regarding the pre-packaged insolvency resolution process for Micro, Medium and Small-scale companies that are brought lately under the Insolvency & Bankruptcy Code (Amendment Act), 2021.
Benefits of PIRP
A pre-pack is an arrangement whereby the sale of all or part of a company’s business and/or assets is negotiated and agreed, before an insolvency practitioner (IP) is appointed with the relevant documentation being signed and implemented, immediately or shortly after the appointment is made. It comes with many advantages for the companies such as it saves time, costs, efforts, payment of insolvency professionals, application fees etc. It also keeps the management of the company in hands of the promoters of the company unlike in the regular insolvency resolution process where all the management of the company including displacement of the assets of the company, day to day business practices, all properties and other functions and powers of the directors or the owners of the company are taken over by the insolvency professional from the debtors. It would also reduce the stress and workload of NCLT, and it definitely provides more flexibility as compared to the proper statutory process under the insolvency process.
IBC is gaining acceptance as a means for debt resolution lately. From looking at the figures of FY 2020-21 there appears to be a significant rise in the no. of registration of applications for insolvency resolution. When IBC first came in 2016 till 2017 only 37 cases were registered whereas at the beginning of 2020 the number stood at 2196. Though circumstances changed a lot since March 2020 due to the COVID-19 pandemic, more and more companies were going to suffer losses and the borrowers were left with no source of borrowing to rejuvenate the economy. The economy was falling but the numbers for insolvency applications were rising. So, by the fourth quarter of the financial year 2020, the caseload stood at 4,139. i.e., it almost doubled when fresh bankruptcy proceedings were suspended.
According to the data of IBBI only 8% of cases have been approved with resolution plans, 8% of cases got withdrawn, 22% of cases got closed, 27% cases went into liquidation and the remaining 41% cases were still pending by the end of December 2020. The resolution percentage remains very low because of which MSMEs suffered many of the cases which were withdrawn due to lack of requirement of 1 cr. Rupees for initiating insolvency. This data shows how much India needs a pre-pack insolvency process to lift up the business and the economy.
International Provisions of Pre-Pack Insolvency
United Kingdom
The Insolvency Act, 1986 of the United Kingdom did not have provisions disallowing or allowing pre-pack insolvency resolution. When businesses and corporations started to resolve insolvency on their own without appointing and without the interference of resolution professionals, thereon it started to become a traditional practice in the UK. However, a drawback to this practice was that the corporate debtors dissolved their assets without any notice to the affected creditors because of which losses were suffered and interest of the creditors was losing in the UK.
Statement of Insolvency practice called SIP ’16 was released in 2009 to resolve the related party transactions and bring more transparency in the insolvency resolution process. The SIP refers to pre-packaged sales. In this arrangement, the assets and the businesses of the corporations are negotiated for sale before the appointment of the administrator. The administrator here acts as the insolvency practitioner when the process is authorised by the administration then the sale is executed.
United States
Section 363 of the United States bankruptcy code permits prearranged bankruptcy. The US has a separate bankruptcy court who has restructuring powers of a debtor whereas the original jurisdiction lies with the district courts but they can refer matters or go for appeals to the bankruptcy court, as well. The US laws have a provision wherein there is a trustee who assists the bankruptcy judges in performing their functions effectively. They help in the smooth functioning of the process and do not interfere with the insolvency process by overtaking the business and the assets of the corporate debtor.
The trustee helps in bringing transparency to the process to protect the interest of the creditors so that the corporate debtor does not dispose of the business assets to somewhere to their advantage and at the loss of the creditors and also ensures that no laws are violated by the debtors during carrying out the insolvency process. The trustee makes sure that the debtor informs all the creditors of his plan and looks if any creditor has objections against the structure. He then has to take approval from the bankruptcy court. It provides to all the creditors a disclosure statement and a plan structure. After the plan is approved by all the creditors then the corporate debtor files a petition before the court.
UNCITRAL (United Nations Commission on International Trade Law)
The UNCITRAL has provisions for expedited reorganization proceedings in which restructuring negotiations are held on a voluntary basis, and a plan is confirmed only after a majority of affected creditors agree to it. This provision is similar to pre-packaged insolvency proceedings.
Canada
In Canada when a business is in a distressed situation then they do not enter into liquidation usually they find a buyer for their company i.e., in Canada Pre-packaged selling is done, as well. The business of the corporate debtor is sold and the revenues therein are used to structure a plan for the creditors. The companies apply under the company’s creditor arrangement act under which they look for a buyer for the company. The selling of the business then has to be approved by the court and provides the title to the buyer.
Singapore
Singapore has come up with Insolvency, Restructuring, and Dissolution (Amendment) Act, 2020. This Act was amended in wake of the COVID-19 situation for micro and small companies. To bring a pre-pack scheme for them. This is very much similar to the Indian process in which a moratorium period is imposed when a company enters into the resolution process. In order to process and get the restructured plan’s approval by the court, the company needs to show that the majority of the creditors approves the plan.
Indian laws
IBC (Amendment) Act, 2021
India introduced the IBC (Amendment) Act, 2021 to give a hand to the falling MSMEs. There was a severe downfall of the MSMEs in 2020 due to Covid-19. The government even banned more registration of applications till December 2020 and came up with a pre-packaged insolvency resolution process (PIRP) as an amendment in the IBC, 2016.
Section 54(A) -54(P) has been made as a special provision for PIRP, also to mention that all other sections are also applicable over PIRP. It can be applied by any MSME corporate debtor subject to some conditions, like, the corporate debtor must not be undergoing any PIRP or CIRP presently or in the previous 3 years from the date of the application. The application has been approved by 66% of the creditors and the creditors must not be a related party of the corporate debtor, no order of liquidation is passed against the corporate debtor, etc.
- The corporate debtor before filling the application for initiating the PIRP needs to obtain the declaration from the financial creditors as specified in Section 54 of the Code.
- Section 11 (aa): No proceeding of CIRP OR PIRP can be initiated against a corporate debtor who is already undergoing a PIRP.
- The corporate debtor prepares a base plan for resolution and that plan has to be approved by the financial creditors to proceed further then that plan will be submitted to the adjudicating authority i.eNCLT which can either be approved or rejected by them. If the plan is rejected then a resolution professional will be appointed.
- If the plan is accepted by the NCLT then a moratorium period will be imposed and resolution professionals will be appointed: 54 (E) (1).
- The PIRP process is faster than CIRP, COC shall be appointed within 7 days 54(F)(2), 54(D)(1) PIRP shall be concluded within 120 days and after approval, the resolution plan shall be submitted before the NCLT within 90 days.
- Section 54(H): The management of the company in PIRP does not get transferred to the resolution professional instead it remains with the board of the corporate debtor only, but if any fraudulent activity is detected during the process for instance the assets of the company are being disposed off or being concealed, or creditors are related parties etc then the management of the company would not stay with the corporate debtor board.
- Regulation 48, IBBI (PIRP) Regulations 2021: PIRP will be conducted and guided according to the Swiss challenge which will help bring a better resolution plan.
What can India learn from international provisions?
- Debtor-in-possession and US trustee: This concept from the US can be adopted in Indian Insolvency laws and specifically in pre-pack. It means that even during the resolution process, the management of the company remains with the board of the company itself. But the US also has a provision of appointing a US trustee who is a person who helps the court in performing its functions properly by assisting them and ensuring that transparency shall remain in the process and that the interest of all the stakeholders is kept as the working remains in the hands of the debtor only, so the concept of the debtor in possession and of US trustee can be adopted by India.
- The Phoenix Company Concept in the UK: Phoenix is a fictional bird who is reborn from its own ashes. Similar to this concept, the UK has a provision for its insolvent companies that the directors or shareholders of the insolvent company can buy back it and form another new company with the same objectives. In India, this happened with the Essar steel group when they bought back their own company, but it was considered illegal. Therefore, Section 29A was introduced in IBC which prohibits such buy-back. The UK has enumerated various procedures and steps, regulations before setting up a phoenix company. India has been burdened a lot already with numerous applications coming for insolvency, so the phoenix company concept is something that can be adopted by checking that the creditors agree with the company doing so.
- Specialized Bankruptcy Court: India should have specialized judges and courts to handle insolvency and bankruptcy issues. The order of these judges should be final with appeals available before higher courts. In the United States, there are specialized bankruptcy courts who identify the matter and announce the final order thereupon though the original jurisdiction vests with the district courts which can be referred to those specialized courts.
- Transparency: Internationally pre-packaged insolvency is accompanied by more transparency in the process to ensure that the creditors and all other stakeholders interests remain protected. As flexibility and more freedom is given to the corporate debtor in the pre-pack process, with these powers some obligations are also necessary to be imposed over the corporate debtors to keep a check on the exercise of these powers.
Conclusion
Pre-pack is a modern practice, and it should definitely be promoted in the Indian economy because if it is implemented with some checks and regulations, it can really help the business and the economy of the country grow alongside. It has many advantages, for instance, it saves the capital, time, and efforts of the company, which is already undergoing insolvency, and, in that situation, they have to go through fees of IRP and various court procedures. It also helps in reducing the burden of the NCLT who has an ample caseload of companies’ law cases and many other IBC cases as well.
Many companies find themselves stuck in the insolvency period and so many of them have withdrawn their cases from the NCLT because it took a lot of time and money. Additionally, the creditors had to suffer in that period which discouraged them from further investing in other businesses as their money was stuck due to delay in the resolution. Therefore, it is best for the companies to go through the pre-pack process and as such they must first come up with their own plan and then get it approved by the tribunal, this saves the time of both the company and the tribunal.
References
- Singh, H. (2020). Pre-packaged Insolvency in India: Lessons from USA and UK. SSRN Electronic Journal. doi:10.2139/ssrn.3518287
- Tollenaar, N. (2019). The US Chapter 11 Plan Procedure. Pre-Insolvency Proceedings, 114-160. doi:10.1093/oso/9780198799924.003.0006
- Wadhwa, A., Wadhwa, K., Wadhwa, A., Wadhwa, R., Wadhwa, A. H., Shetty, T., . . . Datar, A. P. (2019). Wadhwa Law Chambers guide to insolvency & bankruptcy code: (an exhaustive commentary on the Insolvency & Bankruptcy Code, 2016). New Delhi, India: Wadhwa Sales Corporation
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