‘Pre pack resolution process has some serious pitfalls’

Vinson Kurian Thiruvananthapuram | Updated on May 11, 2021

Financial institutions may forfeit the ‘golden hours’ available for putting the entity back on track, says Bijoy Pulipra

The Pre Pack Insolvency Resolution Process (PPIRP) as an alternative insolvency resolution process for MSMEs may not yet be an effective solution in the prevailing environment for a country such as ours beset as it is with an inadequate legal infrastructure and poor legal literacy.

Introduction of complex laws such as PPIRP could have ideally waited until these faculties mature enough to be able to handle the processes involved, says Bijoy Pulipra, Company Secretary and Insolvency Professional.

The Insolvency and Bankruptcy Board of India introduced PPIRP to reduce the court process and litigation expenses involved in the Corporate Insolvency Resolution Process (CIRP), he recalled.

Alternative resolution process

It is envisaged as an efficient alternative insolvency resolution process for corporate persons classified as micro, small and medium enterprises (MSME) under the Insolvency and Bankruptcy Code, 2016, ensuring quicker, cost-effective and value-maximising outcomes for all stakeholders.

The PPIRP is also intended to attract more resolution applicants, which is a mandatory requirement for a successful turnaround of the stressed corporate debtor, Pulipra told BusinessLine.

“Promoters of the stressed corporate debtor are permitted to negotiate with the creditors to resolve debt. If this fails, the corporate debtor will need to face CIRP under the supervision of the National Company Law Tribunal (NCLT). The PPRIP may appear to promise an easy and faster solution but has some serious pitfalls.”

Alien to CIRP concept

For instance, the PPIRP permits defaulting promoters to manage day to day activities of the corporate debtor, which is totally alien to the concept of CIRP under which the resolution professional steps into the shoes of the corporate debtor to operate the same as a ‘Going Concern’ and protect the assets.

“Financial institutions which are only too well aware of the stressful situation of the corporate debtor may not be willing to permit the same persons to manage the business, given that the prospect of asset stripping becomes a distinct possibility,” said Pulipra.

By experimenting with the PPIRP, the financial institutions may also forfeit the ‘golden hours’ available for putting the entity back on track through effective intervention. “Letting promoters to operate the defaulting business risks compromising all transparency that might lead it into more litigation in future.”

Allows for a 'calm period'

The major attraction under CIRP is the moratorium declared by the NCLT, says Pulipra, which is a ‘calm period’ for the Resolution Professional to revive operations of the corporate debtor without any intervention from the creditors. This advantage is totally missing under PPIRP.

“The stress on promoters will not reduce during the PPIRP period and hence the creditors may move against the corporate debtor during this period before various legal forums for recovering their dues. This could also affect the effective and peaceful implementation of the process.”

Operational Creditor plight

Given these issues, banks and financial institutions may not be keen to adopt PPIRP in the first instance. PPIRP is also akin to the CIRP inasmuch as Operational Creditors is concerned. The Financial Creditors are given absolute upper hand in both cases whereas Operational creditors are cornered and sidelined.

According to Bijoy Pulipra, permitting the same promoters to control and transfer assets of the defaulting Corporate Debtor will lead to a growing lack of trust among both the unsecured and operational creditors since they would have no say in the decision-making process.

Published on May 11, 2021

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