India ^[1]

The Insolvency and Bankruptcy Code 2016 (IBC) was passed by the Indian Parliament in May 2016, replacing the entire gamut of extant insolvency and restructuring laws in India by introducing a single comprehensive law for insolvency of corporates and individuals. Before the enactment of the IBC, the Companies Act 1956 contained provisions for liquidation of companies; and debt recovery was governed by the Recovery of Debt Due to Banks and Financial Institutions Act 1993, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002, and the Sick Industrial Companies Act 1985, which dealt with rescue and rehabilitation of distressed industrial firms. IBC was thus introduced to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons in a time-bound manner for the maximisation of the value of assets.^[2]

The IBC has been one of the main landmark financial sector reforms in India in recent years and was introduced to address the crisis of large non-performing assets in the banking sector. The provisions relating to insolvency of companies and limited liability partnerships were notified on 1 December 2016. The provisions relating to insolvency of personal guarantors to corporate debtors were notified with effect from 1 December 2019. The provisions relating to insolvency of partnership firms and other individuals (who are not personal guarantors to corporate debtors) are yet to be notified. Prior to 2021, there was no regime for comprehensive pre-packaged insolvency resolution in India (while there were certain other avenues for similar results).

The covid-19 pandemic resulted in significant distress to Indian businesses, particularly to micro, small and medium enterprises (i.e., enterprises with investments or turnover below specified amounts (MSME)). It became imperative to introduce an attractive framework for resolution of stressed companies that (1) promoters would willingly adopt (because the promoter stayed in control, the process was quick and the promoter could participate); (2) creditors knew they had sanctity in the process (statutory process, wide creditor participation, independently run process, court approval) to minimise risk of future questions; and (3) included cram-down and whitewash abilities as under the IBC, particularly for MSMEs.

It is against this background that the Indian framework for pre-packaged insolvency resolution of micro, small and medium enterprise companies (PPIRP) was introduced. PPIRP allows creditors and MSME companies or promoters to resolve stress early with speed, efficiency and efficacy, provides certainty of outcome and gives them both a chance to improve value for all stakeholders.

PPIRP was introduced by the government of India on 4 April 2021 through the Insolvency and Bankruptcy Code (Amendment) Ordinance 2021. This was later assented to by the Indian legislature through the passing of the Insolvency and Bankruptcy Code (Amendment) Act 2021. As such, the framework is still in its nascent stages of development.

Brief overview of key restructuring tools

Corporate insolvency resolution process under the IBC

Currently, in India, the insolvency process for companies and limited liability partnerships is governed by IBC and the regulations framed under it.^[3] An entity against whom corporate insolvency resolution process (CIRP) under the IBC has been initiated, for its inability to pay its debt, is known as the corporate debtor. An application to initiate CIRP can be made by a financial creditor,^[4] operational creditor^[5] or by the corporate debtor itself upon default of an amount of 10 million rupees.^[6] The application is made to the adjudicating authority under IBC (i.e., the National Company Law Tribunal (NCLT)). If NCLT determines that the application complies with the requirements set out in IBC (i.e., with respect to existence of debt and default), it is required to admit the application against the corporate debtor and CIRP commences. Consequently, the management of the corporate debtor is suspended and the NCLT appoints an intermediate authority known as the interim resolution professional (IRP) to take over the management of the corporate debtor.^[7] Further, as soon as the CIRP commences, there is a moratorium declared with respect to the corporate debtor whereby there is a stay on all legal proceedings against the corporate debtor and a prohibition on transfer of its assets and enforcement of security interest.^[8]

The IRP invites claims from the creditors of the corporate debtor and a committee of creditors (CoC) is formed comprising the financial creditors of the corporate debtor. The CoC is the decision-making body for the administration of the corporate debtor during the CIRP. Once the CoC is constituted, it appoints a resolution professional (RP) to take over duties of the IRP for the remainder of the CIRP. The RP invites submission of resolution plans by resolution applicants. There are certain persons, including former promoters of the corporate debtor, who are disqualified from being a resolution applicant.^[9] The resolution plan is supposed to, inter alia, provide for the payment of all the creditors of the corporate debtor and for the management of the corporate debtor as a going concern.^[10] If the CoC approves the plan with a 66 per cent majority and the NCLT sanctions it, then the CIRP comes to an end and the corporate debtor undergoes resolution as per the approved plan. If the CIRP is not completed within 330 days as mandated by IBC, or if the CoC opts to wind up the corporate debtor, the corporate debtor goes into liquidation.

Thus, the insolvency process under IBC prioritises the revival or rehabilitation of the corporate debtor, and if that does not turn out to be possible, then it facilitates its closure.

The Standing Committee of Finance recently released a report on IBC wherein it shared the statistics on insolvency resolution under the legislative framework since its promulgation.^[11] As per the data shared, as of May 2021, 32,547 cases under IBC have been filed so far, out of which NCLTs have disposed of 19,377 cases, with 13,170 cases still pending.

The Standing Committee noted that the reason for delay in insolvency resolution is due to delay in admission of cases and approval of resolution plan by the NCLTs.^[12] It further recognised that introduction of PPIRP may help reduce the burden on the NCLTs^[13] by allowing the creditors and debtors to negotiate terms of restructuring and subsequently approach the NCLT only to obtain legal sanction on the same.

In 2017, the World Bank in its Ease of Doing Business Report ranked India 136th out of 190 countries on the insolvency resolution parameter.^[14] However, post the enactment of IBC, India jumped to rank 52.^[15] The availability of PPIRP as an alternative to CIRP will hopefully help India further improve its ranking for insolvency resolution.

Overview of PPIRP

As mentioned earlier, presently in India, PPIRP is only available for MSMEs. An MSME may, as a corporate debtor, initiate PPRIP when the default is of at least 1 million rupees. However, the option of availing PPRIP is not available to those corporate debtors who have undergone PPRIP or CIRP in the three years preceding the date of the application or are ineligible under Section 29A of IBC. This is to prevent errant defaulters from avoiding paying off their dues on time and repeatedly taking recourse to the mechanism to restructure their debt.

Before a corporate debtor can file an application to initiate PPRIP with the NCLT, it requires consent from at least 66 per cent of its unrelated financial creditors and a special resolution passed by its shareholders.^[16] The corporate debtor must furnish the financial creditors with a base resolution plan before they seek approval from the creditors for initiation of the process.^[17]

Unlike CIRP, PPRIP envisages a debtor-in-possession with a creditor-in-control model for resolution of the corporate debtor. The unrelated financial creditors with a 66 per cent majority can propose the name of an insolvency professional to be appointed as RP and such an insolvency professional would be responsible for ensuring that the corporate debtor complies with all the requirements mandated for initiation of PPIPR.^[18] Upon approval of the application for initiation of PPIRP, the NCLT shall declare a moratorium, having the same effects as one under CIRP, and appoint an RP. However, in a PPIRP, the RP is not responsible for running the business of the corporate debtor but is tasked with monitoring its management, constituting the CoC and maintaining the list of creditor claims.^[19] However, control of the corporate debtor may be vested with the RP if the CoC with a 66 per cent majority votes for the same and such a proposal receives approval from the NCLT on the ground that the management of the corporate debtor is being run in a fraudulent manner.^[20]

The corporate debtor is required to submit a base resolution plan to the RP within two days of commencement of PPIRP.^[21] The RP shall present it to the CoC who may approve it by the requisite majority of 66 per cent as long as it does not impair any claims owed by the operational creditors.^[22] If the base resolution plan does not receive the required majority, or if the rights of operational creditors are impaired, the RP has to invite prospective resolution applicants to submit plans to compete with the base resolution plan submitted by the corporate debtor.^[23] The different plans submitted by prospective resolution applicants, who are in conformity with Section 30(2) of IBC, are presented by the RP to the CoC who selects one from among them.^[24] If, based on predetermined criteria, the selected resolution plan is significantly better than the base resolution plan then it can be approved by the CoC for submission to the NCLT.^[25] If the selected resolution plan is not significantly better or the CoC does not approve it, then a competitive process is initiated wherein the resolution applicant and the corporate debtor have to improve their plans. The winning plan is approved by the CoC with a vote of 66 per cent^[26] and then presented by the RP to the NCLT. Once the NCLT clears it, after checking the plan to see if it provides for effective implementation, the PPIRP process comes to an end.^[27] IBC mandates that the entire PPIRP must be completed within 120 days of the commencement of the process.^[28]

Can a restructuring be implemented on a pre-packaged basis?

Which processes can be implemented in this way?

Pre-packaged insolvency resolution is currently only available to MSME companies. It should be noted, however, the Insolvency Law Sub-Committee, which was the committee responsible for developing the key contours of this framework, has indicated that they intend to extend PPIRP to all other companies in due time. Apart from being an MSME, the company must have also committed a default in excess of 1 million rupees. Further, unlike CIRP, PPIRP is to be initiated by the company undergoing PPIRP themselves.

If a company meets all of the requirements above, they must also complete several steps prior to initiation that have been put in place to mitigate abuse of PPIRP. First, they must pass a board resolution declaring that PPRIP is not being initiated to defraud any creditors and appointing a resolution professional to oversee the process. Following this, the shareholders of the company must pass a special resolution consenting to the initiation of PPIRP. Lastly, the company must seek approval from 66 per cent of its unrelated financial creditors. Without any of the above approvals, the relevant adjudicating authority will not admit the company into PPIRP.

If a CIRP process is already pending against a corporate debtor and 14 days have passed since the CIRP application was filed, the courts are required to deal with the CIRP application first. However, if an application for PPIRP is filed within 14 days of the CIRP filing or before the CIRP filing all together, the court is required to give priority to the PPRIP application.

Once initiated, PPIRP may be just the restructuring solution needed for a company in the early stages of distress (and in this case, with the promoter incentivised to action the restructuring). From the date of default, a promoter will have 15 months before he or she is likely to be disqualified from bidding for his or her own company if it were admitted under IBC proceedings (because under Section 29A of the IBC, 12 months would have passed from his or her company’s account becoming a non-performing asset). It is in this 15-month window that we hope promoters (otherwise eligible under Section 29A of the IBC) will action a PPIRP.

If not a true ‘pre-pack’, can the aims be achieved through other means?

As mentioned above, PPIRP is only available to MSMEs with whom there is default in excess of 1 million rupees and who are able to get all the requisite approvals to file for PPIRP themselves.

If a company does not meet these criteria, or in case a financial or operational creditor would like to initiate restructuring proceedings against a defaulting debtor, the company must avail of a scheme of arrangement or CIRP under the IBC. These processes have been described above.

Overview of scheme of arrangement under company law

A company may enter into a scheme of arrangement with its creditors or shareholders to, inter alia, restructure, some or all of its debt. This would entail (1) approval of requisite majority of creditors (if their interests are involved), or members (if their interests are involved), (2) no objections from certain statutory authorities such as the registrar of companies, tax authorities, securities board, etc. (in the case of public listed companies), etc., and approval of the company court (i.e., the NCLT, which also has jurisdiction over scheme of arrangement matters). This route is typically time-consuming, fraught with uncertainty and often does not achieve complete cram down of typically subordinated classes of debt (such as operational debt, etc.).

Overview of Section 12A withdrawal process under IBC

While the IBC ordinarily discourages and even restricts promoters from acquiring defaulting companies, in certain cases, with the consent of 90 per cent of unrelated financial creditors, the promoter can pull back a corporate debtor from insolvency resolution, while also restructuring the debt of such financial creditors. However, this route does not enable restructuring or cram down of other debt (such as operational creditors dues) and therefore is not effective.

Case studies or relevant examples

Since the concept of a pre-pack was introduced in India, there has been only one case of an MSME initiating PPIRP.^[29] On 14 September 2021, the Ahmedabad bench of the NCLT pronounced its order admitting the application for pre-packaged insolvency resolution process of M/s GCCL Infrastructure & Projects Limited (GCCL) under Section 54A.^[30] Details of this restructuring, to the extent they are publicly available, have been included below.

Overview of pre-restructuring structure

GCCL is a public limited company that was incorporated in October 1994. The company’s shares are listed on the Bombay stock exchange. GCCL was engaged in real estate development with a wide portfolio of commercial and residential projects in Gujarat. Its corporate office is in Ahmedabad, Gujarat. At the time of writing, 61.68 per cent of its shares are held by its promoter group while the remaining 38.32 per cent are held by the public. GCCL is an MSME company that had a total debt owed to its various creditors amounting to 5,416,250 rupees.

Overview of implementation options

As a result of defaults that occurred in December 2020, GCCL filed an application under Section 54A of IBC to initiate its PPIRP. Prior to filing the application, GCCL obtained a special resolution from its members whereby the members consented to the initiation of PPIRP. This was followed by a declaration from the directors of GCCL along with approval from GCCL’s financial creditor who also appointed Mr Parag Sheth as the interim resolution professional.

The NCLT, upon satisfaction that the application to initiate PPIRP was complete in respects and met all requirements of the law discussed in Section II and Section III, admitted the application. As part of its order the NCLT declared a moratorium and appointed Mr Sheth as the resolution professional. While not required under the law, the NCLT also directed the RP to submit an interim report to it within 30 days, which indicates that it will be keeping an eye on the process to ensure that the first case of PPIRP in India gets resolved smoothly.

Process to achieving a pre-packaged deal

Following the commencement order by the NCLT, GCCL has publicly announced the particulars of the PPIRP process on its website and has disclosed on the Bombay Stock Exchange that it has constituted its committee of creditors. The first meeting of the CoC was held on 28 September 2021.

At the meeting of the creditors on 2 December 2021, the creditors were presented with the base resolution plan prepared by the company.^[31]

It is expected that if the base plan does not impair any claims owed by GCCL to its operational creditors, then each CoC member will have the option to either approve or reject the resolution plan. If the plan is approved by 66 per cent of the CoC members (in proportion to the value of their financial debt) the base resolution plan shall be deemed accepted allowing GCCL to implement the plan and draw the PPIRP process to a close.

If the plan is not approved by the CoC (or impairs on the operational creditor’s claims), GCCL will be required to conduct a competitive process whereby bids are invited from external prospective resolution applicants in the manner described above.

Implementation and outcome

Following either approval of the base resolution plan or the conclusion of a competitive process, the RP shall submit the successful plan, whichever that may be, to the NCLT for approval. Following approval by the NCLT the plan shall then be implemented in accordance with the particulars therein. It should be noted that a successful PPIPR resolution shall bring with it several features that will be beneficial to both the corporate debtor and its creditors, specifically cross-class cram-down, whitewash of past liabilities, and a court order sanctioning the plan. Further, although the law requires the process to be completed within 120 days from the commencement of PPRIP (in this case by 12 January 2022), it is possible that the entire process may be completed in only a matter of weeks.

Conclusion

Can you achieve a pre-pack?

Although the pre-pack has no statutory definition, it is generally understood to mean a restructuring plan agreed to by the debtor and its creditors prior to the insolvency filing, and then sanctioned by the court on an expedited basis. The statutory framework for PPIRP under the IBC requires the corporate debtor to furnish a base resolution plan to the financial creditors before they allow for commencement of PPIRP and such a plan has to be approved by NCLT within 30 days of receipt of the plan. Therefore, one can achieve a ‘pre-pack’ under the Indian insolvency regime. However, it is to be noted that IBC also allows third parties to submit resolution plans in case the one submitted by the corporate debtor proves to be inadequate or does not obtain the required majority.

Potential for legislative changes: a look forward

While the PPIRP is presently applicable only for MSMEs, it may be made available for all corporate debtors under IBC as an alternative to full-fledged CIRP, with appropriate safeguards (in the form of requisite lender consent, operational creditor protection, etc.).

The Insolvency Law Committee, in its report, has also observed that since PPIRP provides for a debtor-in-possession model, it is imperative that the affairs of the corporate debtor are not managed in a way that undermines the interests of the creditors and other stakeholders or is in derogation of the objectives of IBC.^[32] Thus, it recommended that there should be a code of conduct for the management of the corporate debtor and this suggestion was incorporated in the statutory framework for PPIRP. Such standards for the conduct of promoters and board of directors with regards to the running of the corporate debtor are to be stipulated by the regulator.

While IBC provides for a cooling-off period to ensure that corporate debtors do not take recourse to PPIRP repeatedly, further safeguards may be implemented to ensure that such pre-packaged restructuring is not followed by fresh financial defaults.

A further legislative change that may be considered is expanding the applicability of PPIRP to permit initiation directly by an adequate majority of financial creditors. This would allow the creditors to explore opportunities under the pre-pack process even without promoter cooperation, helping to resolve complex situations.