Pre-packaged insolvency resolution process in the making for Covid-hit India Inc

With the moratorium on filing fresh insolvency coming to an end this March, the government is working on a pre-packaged insolvency resolution (PPIR) process for Covid-hit India Inc and to give banks a breather.

The pre-packaged insolvency process will not only avoid flooding of cases at NCLTs, but will also give existing promoters a chance to salvage their business.

A panel of experts led by the Insolvency and Bankruptcy Board of India Chairperson, M.S. Sahoo, has recommended quick amendments to the bankruptcy code to allow corporate turnaround plans to be struck efficiently outside tribunals, and later approved by the judiciary as an alternative to the regular process.

The pre-packaged schemes should be available to all corporate debtors and for any stress, pre- or post-default. The panel said it could be implemented in phases.

“It may commence in respect of defaults from ₹1 lakh to ₹1 crore and Covid defaults for which the insolvency resolution process is not available today, followed by default above ₹1 crore, and then default from ₹1 to ₹1 lakh," said the panel.

The proposed insolvency package is akin to out-of-court settlements where the debtor gets to retain the company, while the insolvency professional takes over the management.

Though the debtor can file an application for PPIR before the Adjudicating Authority, it requires 51 per cent consent from shareholders and a similar percentage point approval from unrelated financial creditors, thus, keeping the process of initiation absolutely transparent.

Unrelated financial creditors will appoint a Resolution Professional, who will monitor the entire process to ensure that lenders and debtors do not indulge in malpractice that is detrimental to other unsecured creditors.

Nadiya Sarguroh, Senior Associate, MZM Legal, said the entire process has several benefits such as securing the interest of all stakeholders, the viability of the debtors’ business, and being time-bound with 90 days for completion of PPIR and submission of resolution plans before the adjudicating authority, who will approve the plan within 30 days.

However, she said the process may slow down as there could be an influx of PPIR applications, adding to the burden of NCLTs, which are already burdened by regular CIRP.

Apart from deciding on the case, the Adjudicating Authority will decide on whether the moratorium will be applicable during the PPIR. With such a burden, it appears impossible for the Adjudicating Authority to complete the process within 90 days, said Sarguroh.

Aashit Shah, Partner, J Sagar Associates, said ensuring transparency in the pre-pack process is paramount, failing which it will be drawn into a legal quagmire.

While the timeline for resolution looks good on paper, it is imperative that the number of NCLT benches are increased exponentially to achieve this target, he added.

Though the entire process appears to be transparent, the devil lies in the detail and the regulations to be announced, said Gada.