Following significant deliberations by the Insolvency Law Sub-Committee chaired by Mr. M.S. Sahoo (Chairman of the Insolvency and Bankruptcy Board of India), along with other advisors, including our founding partner Mr. Bahram Vakil, the Government of India, has on April 04, 2021 notified the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 to introduce a framework for pre-packaged insolvency resolution of micro, small and medium enterprise companies (‘PPIRP’).

India has over time evolved several mechanisms for resolving distress in companies. Some of these are fraught with challenges which delay or prevent resolution. For example, there may be too many diverse creditors who would not fall in line or there may be the pre-requirement of an inter-creditor agreement, which few creditors end up actually signing on to or a requirement of consent of all classes of (out-of-the-money) creditors and shareholders which would not be forthcoming.

Insolvency and Bankruptcy Code: 

The Insolvency and Bankruptcy Code, 2016 (‘IBC’), of course, resolved many of these issues (including a clean-up of contingent debts, penalties/fines/attachments over assets and hold-back debts). But resolution under the IBC can take a year or more, requires the promoter to step-off and enables third parties to buy the company. As a result, promoters have been averse to initiation of proceedings under the IBC against their company, at the early stages of distress. Therefore, by the time the company eventually becomes subject to proceedings under the IBC, its value may have been significantly eroded.

Need for More:

The COVID-19 pandemic resulted in significant distress to Indian businesses and particularly to micro, small and medium enterprises (‘MSME’). It became imperative to introduce an attractive framework for resolution of stressed companies – particularly for MSMEs, which (i) promoters would willingly adopt (because the promoter stayed in control, was quick and the promoter could participate); (ii) 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 (iii) included cram-down and whitewash abilities as under the IBC.

The Indian prepack, which has become law, we hope will be just that – allowing creditors and MSME companies / promoters to resolve stress early with speed, efficiency and efficacy of process, certainty in outcome and give them both a chance to improve value for all stakeholders.

Key Features:

This process is debtor led and the debtor stays in possession. The resolution professional supervises the process and the committee of creditors has approval powers for specified matters. It is expected that before initiating PPIRP, the debtor will enter into a detailed restructuring contract with (ideally) 66% of creditors. Only the debtor (with consent of 75% of shareholders) can initiate PPIRP. If the debtor has the support of 66% of the creditors (required to approve a resolution plan) and is paying off all operational creditors, the PPIRP process may be completed in a matter of a few weeks, with all the benefits of an IBC proceeding, such as moratorium, cross-class cram-down, whitewash of past liabilities, court order sanctioning the plan, etc. If 66% of the creditors do not accept the debtor’s proposal or the proposal does not pay operational creditors in full, then there is expected to be a short, sharp and well defined competing process, which should not permit prolonged and uncontrolled bidding wars. Note that operational creditors can be paid less than their dues, however, in order to do so, the debtor’s resolution plan which crams such creditors down cannot be accepted without carrying out a public competitive process (in case other bidders offer more, including to the operational creditors).

Way Forward:

PPIRP is currently available to MSME companies but is intended to be extended to all other companies in time. When that happens, 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 is likely to be disqualified from bidding for his own company if it were admitted under IBC proceedings (because under Section 29A of the IBC, 12 months would have passed from his 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. 

Additional details of the pre-pack process are available here and a timeline of the process is available here.