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Pre-packaged insolvency for MSMEs to lead to quicker resolutions, help preserve value of assets, say experts

However, banks will have to be careful about ensuring transparency and keeping out fraudulent promoters.

July 28, 2021 / 07:13 PM IST
The Insolvency and Bankruptcy Code (Amendment) Bill, 2021 is aimed at providing speedier, cost-effective, semi-formal and less disruptive framework for insolvency resolution of corporate debtors in distress, according to the Lok Sabha bulletin. The bill will replace an ordinance. (Representative image)

The Insolvency and Bankruptcy Code (Amendment) Bill, 2021 is aimed at providing speedier, cost-effective, semi-formal and less disruptive framework for insolvency resolution of corporate debtors in distress, according to the Lok Sabha bulletin. The bill will replace an ordinance. (Representative image)

The introduction of the much-awaited pre-packaged insolvency resolution mechanism for micro, small and medium enterprises (MSMEs) will lead to quicker resolutions of bad assets in the banking sector besides helping to preserve the value of the assets, experts said.

On July 28, the Lok Sabha passed the Insolvency and Bankruptcy Code (Amendment Bill), 2021, which replaced the IBC Amendment Ordinance 2021 promulgated in April. The ordinance had first introduced pre-packs as an insolvency resolution mechanism.

According to an information brochure issued by the Ministry of Corporate Affairs, the pre-packaged insolvency resolution process (PPIRP) is available for resolving stress where the default is at least Rs 1 crore. Unlike the corporate insolvency resolution process, it is also available in respect of defaults where the default is at least Rs 10 lakh, and defaults that arose between March 25, 2020, and March 24, 2021. Fresh CIRP proceedings were suspended during that period in view of the outbreak of Covid-19.

Unlike CIRP, PPIRP is informal up to a point and formal thereafter. It blends debtor-in-possession with creditor-in-control. It allows the company, if eligible under Section 29A of the IBC, to submit the base resolution plan which is exposed to challenge for value maximisation. After the process of bidding has been completed and a buyer has been identified, creditors can apply formally for the initiation of insolvency proceedings.

Under PPIRP, the company under debtor in possession is able to arrive at a solution. This takes care of the problem of cross-litigation because in IBC, the bulk of the litigation is by promoters, which creates roadblocks for resolution, said Ajay Shaw, Partner, DSK Legal.

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“Hopefully pre-pack will be able to ensure quicker and cost-effective resolution for all stakeholders without disrupting the continuity of the business,” said Girish Rawat, Partner, L&L Partners.

Speed of resolution will also be a key feature of the new regime. “The prepack will put in place a 'debtor in control' regime which will be a good way to ensure value conservation. Also, we hope there would be speedy resolution using this process as the 'creditor in control' regime has been fraught with litigation and decisions being stuck at various levels in the judiciary,” said Dinesh Arora, Partner & Leader - Deals, PwC India.

At the same time, the PPIRP mechanism is likely to be fraught with its own set of challenges. Banks will have to be particular about ensuring transparency in the process. They will also have to steer clear of fraudulent promoters. “The challenge is going to be to bring in high transparency and to ensure that this regime is not misused by fraudulent promoters. The role of and vigilance applied by financial creditors will be the key to its success,” said Arora of PwC India.

The purpose of achieving speedy resolutions will only be achieved if creditors work together to approve or reject resolution plans. “Getting the resolution plan accepted by the lenders is a process in itself as this requires the creditors to come together and approve a resolution plan. Quick resolution-oriented decision making by lenders will be key,” said Shaw of DSK Legal.

Secondly, the process of getting the resolution plan approved by the insolvency tribunal is saddled with the risk of getting embroiled in litigation, Shaw added. It is imperative that courts do not allow frivolous litigation on issues that are well-settled under the law —for example, the right of dissenting shareholders, and right of operational creditors including statutory dues—so long as the same is taken care of as part of the resolution plan, Shaw said.

Already, some banks have set in motion the process of firming up a framework for PPIRP. In May, Swaminathan Janakiraman, Managing Director (Risk, Compliance and Stressed Assets Resolution Group), State Bank of India told The Hindu Business Line that the bank was putting together a board-approved policy framework for implementation of pre-pack among its MSME corporate customers.
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first published: Jul 28, 2021 07:13 pm
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