Pre-packaged insolvencies ‘the need of the hour’

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Insolvency

With the Insolvency and Bankruptcy Code (IBC) currently suspended, an alternate and complementary mechanism to the Corporate Insolvency Resolution Process (CIRP) is the Pre-packaged Insolvency Resolution Process (PPIRP). In a broad area of corporate restructuring, the PPIRP is a subset where the terms of restructuring usually take place prior to the filing of the insolvency procedure.

The essence of a PPIRP is that it aims to protect the enterprise value of the business while safeguarding the interests of the creditors. The company in distress notifies its stakeholders and creditors about the proposal to negotiate a framework for a resolution plan, leading to an out-of-court settlement. Within the corporate arena, liquidation poses a major threat to any company, but unfortunately it is the automatic result of a failure of the CIRP. It is proposed that the PPIRP be introduced in a manner where creditors are mandated to initiate it first, and only upon its failure should they proceed for filing of the CIRP before the adjudicating authority.

A PPIRP is an out-of-court mechanism and may be considered a “peaceful method of settling a dispute”, as often the CIRP has deteriorated relations between creditors and the corporate debtor.

A PPIRP would require an increment in the roles of the insolvency professional, in terms of the discretion he or she would acquire in managing the plan, as well as his/her advisory role and the role as an administrator. A suggested way out of this would be to receive assistance from a more qualified person, such as a registered valuer, who could simultaneously work with the insolvency professional in the formulation and approval of the PPIRP.

For the implementation of a PPIRP in India there are still some unanswered questions that require consideration, including:

  1. Should the immense discretionary power to approve the PPIRP plan rest with the National Company law Tribunal (NCLT) or be delegated to a more specific authority?
  2. While the PPIRP has been addressed, should provisions for pre-arranged sale also be introduced?
  3. What are the incentives for the committee of creditors to actively participate in the PPIRP, instead of initiating a CIRP, so that the entire PPIRP should not be rendered futile?
  4. What is the stance on connected party pre-packs and the role of promoters in a PPIRP?
  5. Upon termination of a PPIRP, after how many days can the creditor initiate a CIRP?

Considering that the IBC heavily borrows from foreign jurisdictions such as the UK and US, it is definitely a consideration for the government to incorporate a PPIRP into the code. The introduction of a PPIRP is the need of the hour due to covid-19, while the traditional CIRP process has been put on hold for the time being.

Pallavi Mishra
New Raipur
Hidayatullah National Law University

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