The article was first published on The PageOne Asia, available here.
Authored by Shreya Narayan,
Partner, Narayan Chamber of Law
The Insolvency and Bankruptcy Code (Amendment) Bill, 2021 (Bill) was recently passed by the Rajya Sabha. The Bill does well in simplifying and expediting the revival process of ailing MSMEs, through the proposed Pre-Packaged Insolvency Resolution Process (PPIRP). However, the Bill lacks clarity, and remains silent on various critical issues. Given that the bill is slated to become a law soon, this is an opportune time to discuss its Good Bad and Ugly.
In case of a default amounting between rupees ten lakhs to one crore, by a Medium Small & Micro Enterprise (MSME), the defaulting MSME can opt for PPIRP. PPIRP allows the sale/ transfer of the distressed MSME much prior to the occurrence of default, thereby enabling timely restructuring, smooth transfer of business, and most importantly, allowing the defaulting MSME to continue without interruption.
The process is also likely to reduce the burden of the National Company Law Tribunal (NCLT) as well, given that it requires minimal filings and minimum court interference. It further balances the interest of creditors of the MSME, as prior approval of not less than 66% of the unrelated financial creditors is required prior to the filing of application for PPIRP.
While the government should certainly be lauded for taking such initiatives, the Bill has few lacunas which need to be addressed.
First, many regulatory and statutory exemptions available to a company under Corporate Insolvency Resolution Process (CIRP), are not available under PPIRP, without explicit exemption or court approval.
These include, exemptions from: taking mandatory open offer obligations under Security and Exchange Board of India (SEBI) takeover regulations in case of resolution pursuant to the Insolvency and Bankruptcy Code, 2016 (IBC); taking permission to acquire more than 75% of the relevant listed company which are generally restricted by a ‘public float’ rule; application of SEBI delisting regulations for delisting of equity shares pursuant to an IBC resolution plan in certain cases; among others.
A good example to look into the aspect of failure of out-of-court resolution process is of Jet Airways-Etihad Airways. The out-of-court resolution process was started by Etihad Airways for Jet Airways much prior to occurrence of default in repayment of loan. However, due to the existing regulatory framework provided by SEBI, Etihad Airways was unable to fulfil the criteria. Accordingly, the out-of-court resolution process miserably failed, which led to insolvency of Jet Airways. It is pertinent to mention that Etihad Airways would have been successful in its resolution, if they had chosen to apply for insolvency resolution before the committee of creditors after the initiation of CIRP, availing the exemptions provided under the CIRP.
Second, the scope of attracting proposals for purchase of MSMEs will be restricted, given that there is no requirement of issuing mandatory public notice for the same. Third, there will always remain an apprehension towards lack of transparency in the management of the distressed MSME during the process, since the existing management will remain in charge of the business.
Fourth, a major role has been given to the Insolvency Resolution Professionals (IRP) under the process, for which we require capacitated IRPs who hold expertise in executing PPIRPs. This has been acknowledged by the Parliamentary Standing Committee set up to examine the workings of the IBC. It expressed apprehensions on fresh graduates being appointed as IRPs, questioning their competence to handle high-stake cases.
Though PPIRP has been proposed to enable swift resolution under the IBC, its in-spirit implementation remains questionable. It is to be noted that there are no prevailing practices, nor any regulatory experience, with respect to PPIRP in India. Furthermore, such a process was neither envisaged by the IBC, nor has been contemplated by any previous statute.
The Way Forward
In order to ensure on-ground implementation of the PPIRP, it is recommended that in addition to amending the IBC, regulations made thereunder should also be amended to bring them in parity with PPIRP. Alternatively, Insolvency and Bankruptcy Board of India (IBBI) may formulate a fresh set of regulations for regulating PPIRP under the IBC.
Also, IBBI should issue a clarification on allowing the applicability of exemptions available under the CIRP to the Resolution Applicants under PPIRP, which will increase the likelihood of a successful resolution.
Issuing public notice for attracting proposals for Resolution for PPIRP by interested entities should be made mandatory, to increase the scope for a better proposal and successful resolution.
Furthermore, just like CIRP, the board of directors should be suspended upon the admission of the PPIRP Application, and the company should be run by IRP till the resolution is complete. This will result in transparency in the management as the ones who are responsible for the distressed position of the MSME are no longer handling its business.
Lastly, IBBI should prescribe a higher degree of professional standard for IRPs overseeing PPIRP, given that they hold a major role in the process, and require expertise in the field. In this regard, a separate selection process may be provided by the IBBI for selection of IRPs for PPIRP.