– Megha Mittal
The Insolvency and Bankruptcy (Amendment) Ordinance, 2021 (‘Ordinance’) was promulgated on 5th April, 2021 to bring into force the prepackaged insolvency resolution framework for Micro, Small, Medium Enterprises (MSMEs). While the Ordinance put forth the structure of the prepack regime, a great deal was dependent upon the relevant rules and regulations. On 9th April, 2021, the Insolvency and Bankruptcy (Pre-packaged Insolvency Resolution Process) Regulations, 2021 (“Regulations”) as well as the Insolvency and Bankruptcy (Pre-Packaged Insolvency Resolution Process) Rules, 2021 (“Rules”) have been notified with immediate effect.
As one delves into the whole scheme of things, including the complicated provisions of the Ordinance and the even complication regulations, one gets to feel that the prepack framework will act only as a consolation for the MSMEs – while efforts aimed to increase the efficacy of insolvency resolution, the proposed Framework seems to do a little towards this end. In the author’s humble opinion, key elements of prepacks – cost and time efficiency and a Debtor-in-Possession approach, have been diluted amidst the micromanaged Rules and Regulations. In this article, we discuss how.
Manifold Approvals and Redundancy
Chapter IIIA of the Insolvency and Bankruptcy Code, 2016 (‘Code’) requires the corporate debtor (‘CD’) to obtain a three-fold approval for initiation of Pre-packaged Insolvency Resolution Process (‘PIRP’), namely shareholders, unrelated FCs and AA. As regards approval from the FCs, Regulation 14 (1) of the Prepack Regulations provides that such approval shall be obtained in a meeting of unrelated FCs, to be called and convened in the manner provided for under the Prepack Regulations.
Further, Reg. 14 (8) provides that the corporate debtor has no FCs, such approval shall be obtained from unrelated Operational Creditors in the same manner as prescribed for FCs, thereby creating an impression that the corporate debtor shall conduct a meeting of all its unrelated OCs – in view of the fact that the number of OCs may be significantly higher vis-à-vis FCs, the process ought to become costly, both in terms of cost and time. It is suggested that instead of such meeting, a faster approval, simply by way of a No-Objection Certificate/ Letter of Assent, could be resorted to.
DIP Approach – A Fallacy?
The very appeal for prepacks, as opposed to a corporate insolvency resolution process is the Debtor-in-Possession (‘DIP’) approach for management of affairs, which gives a CD the assurance that it would revive and resurrect with the management intact. Similarly, in the framework chalked out by the Ordinance, the DIP approach enables the Board of Directors of the CD to manage its affairs, subject to monitoring by the IP, and certain conditions as may be imposed.
However, these conditions, set out in Regulation 50 (2), render the DIP concept infructuous – in addition to prior approval of CoC for transaction beyond a threshold stipulated by the CD, Reg. 50 (2) (b) seems to have left open for the CoC to decide on any conditions to which actions of the CD shall be subject to. Therefore, the debtor in control, comes under the control of the creditors!
A field-level implementation of the same would inherit the probability of superfluous conditions being imposed by the CoC, practically establishing a CIP approach as against the desired DIP.
Identification of Avoidance Transactions – A window too small?
Avoidance transactions, inter-alia, preferential, undervalued and extortionate transactions, come as an inherent risk on insolvency proceedings; as such, it becomes crucial to identify such transaction to restore the value lost due to such transactions.
As regards treatment of avoidance transactions in PIRP, section 54C (3) (c) of the Code requires the directors of the CD to furnish a declaration regarding the existence of any transactions of the CD that may be within the scope of provisions in respect of avoidance transactions under sections 43, 45, 49, 50 and 66 of the Code.
Additionally, Reg. 41 of the Prepack Regulations, requires that the RP shall form an opinion about existence of such avoidance transactions, and if so determined, must file an application before the Adjudicating Authority for appropriate relief.
While the author concurs to the understanding that mere reliance on the declaration furnished by the directors would not be sufficient, the prescribed window of 30 days for identification of avoidance transactions does not seem to be sufficient. . Identification of such transactions warrants an in-depth scrutiny of the financials, transactions entered into, other books and papers. In many-a-case, to opinionate whether there exist avoidance transactions, a transaction audit/ forensic audit may also be required. Thus, to require the IP to identify such transactions within 30 days of PIRP Commencement would seem impractical.
Further, given that failure to report such transactions would result in breach of duties of the RP under section 54F (2) (h), it is suggested that the RP may initiate identification of such transactions in the pre-NCLT stage, that is, after approval of initiation by the FCs, thereby providing the RPs a sufficient window to identify such transactions, and take subsequent actions.
The foregoing critical gaps in the proposed Prepack Framework, seem to indicate that the need to mitigate the COVID impact and provide for a quick insolvency resolution for MSMEs has resulted in a desperate makeshift framework which though provides for a solution, lacks in efficiency and efficacy.
Below we provide the summarized position of law dealing with PIRP, taking into consideration the Ordinance, Regulations and Rules.
Prepack Framework – Process Flow
Summarized Prepack Framework
|Stage||Subject Matter||Relevant Sec./ Reg./ Rule(s)||Provisions||Remarks|
|Applicability||Sec 54A (1) and (2)||Applicable on MSME, having a minimum default as defined in section 4 of the Code||As per Notification dated 9th April, 2021, the minimum default for initiating PIRP has been notified as Rs. 10 lakhs.|
|Appointment of Insolvency Professional||54A (1) (e) read with Reg 14
|Unrelated FCs holding atleast 10% of value, may propose name of the IP whose appointment shall be approved by unrelated FCs holding atleast 2/3rd in value.
The RP to be appointed shall be eligible as per conditions laid down in Reg. 7
|Such proposal and approval shall be obtained in a meeting called by the CD. Notice of such meeting shall be sent to all unrelated FCs, atleast 5 days prior to the meeting, unless a shorter notice period is decided. In there are no FCs, approval in a similar manner, shall be taken from OCs.|
|Approval from FCs||54A (3)||With the assent of atleast 2/3rd of the unrelated FCs||It is not clear whether the required majority, that is, 2/3rd of the FC is to be determined on the basis of the FCs attending the meeting, or the total value of FCs.
It must be noted that there appears to be a conflict in the law – while the Code required that the approval shall be sought from 2/3rd of the FCs, a meeting is quorate with 1/3rd FCs present. Hence, approval shall be based on present and voting
|Duties of the IP||Section 54B read with Reg. 13||Prior to filing of application, the IP shall be required to file an prepare a report confirming whether the CD meets the requirements under section 54A (2), file such reports as may be required.
Such duties shall cease to exist if the application for initiation of the PIRP is not filed within 90 days of approval from FCs, or where the application is admitted/ rejected.
|First, the format of such report, set out in Form P8, does not specify as to whom the Report shall be addressed to. Hence, while it is understood that the report shall be filed with the Adjudicating Authority, the law is ambiguous.
Further, regulation 13 provides that the forms as may be specified by IBBI shall filed on an electronic platform. Hence, it is expected that the forms to be filed by the RP shall be prescribed by way of a notification and/ or circular.
(Filing of application till admission/ rejection)
|Filing of application||Section 54C, read with Reg. 16 to 18, and Rule 4||The application for initiation must be filed by the CD, not later than 90 days from the date of approval by the FCs. The CD shall be required to give several declarations (see Form P7 and P8 of Prepack Rules)||The application shall specify the name and details of appointment of the Resolution Professional approved by the FCs, and be filed in accordance with Form 1 of the Prepack Rules|
|Approval by AA||Sec. 54C (4)||The AA shall admit/ reject the application within 14 days from the date of filing||The timelines imposed on the AA are not mandatory – they are directory in nature (See Surendra Trading Company v. Juggilal Kamlapat Jute Mills Co. Ltd. & Ors).
Hence, timeliness of the process shall significantly depend on the time taken by the AA to admit/ reject the Order.
(Admission of PIRP till submission of Plan to AA)
|Public Announcement||Sec 54E (1) (c), read with Reg. 19||Public announcement shall be made within 2 days of PIRP Commencement Date in Form P9, and be sent to every creditor||The requirement of sending the public announcement to every creditor seems to be a superfluous requirement – aimed benefits of cost and time saving shall become redundant where the number of creditors are very huge.
Further, the very concept of a ‘public’ announcement shall become infructuous if the notice is required to be sent individually to all creditors
|List of Claims||Sec 54F (2) (a) to (d), read with Reg. 20
Sec 54G (1)
|The RP shall confirm the list of claims submitted to it by the CD, and inform every creditor regarding its claims, seeking objections if any. Such objections may be communicated to the RP within seven days from the receipt of communication by RP.
Such list of claims shall be maintained in Form P-10, and shall be updated and made available for inspection by creditors, members, partners, directors and guarantors of the CD and be filed with the Board and presented at the CoC meeting
As per section 54G (1), the list of claims shall, at the first instance, be submitted by the CD to the RP within 2 days of PIRP Commencement Date
|In order to avoid a lengthy process, it is suggested that the objection may be filed by the creditors on the basis of the public announcement itself, within say, 15 days from the date of such public announcement.|
|Debtor-In-Possession Approach||Sec. 54H, read with reg. 50||Unless an application in moved by atleast 2/3rd of the CoC members and the same has been approved by the AA, the management of affairs of the CD shall continue to vest with the Board of Directors, subject to conditions as imposed by the CoC inter-alia prior approval for transaction beyond the threshold stipulated by the CoC||See discussion above|
|Committee of Creditors||Section 54I (1), (3) read with Reg 24-26||CoC, comprising of unrelated FCs, shall be formed within 7 days of PIRP Commencement date.
Where there are no FCs, the CoC shall comprise of 10 largest OCs and 1 representative of Employees and Workmen each
|Meeting of CoC||Section 54I (2), read with Regulation 27 to 34||The first meeting of the CoC shall be conducted within 7 days of its constitution.
The meeting may be called at the instance of the RP, or upon requisition by at least 1/3rd of CoC members.
Notice of the meeting shall be sent to all CoC members, at least 3 days prior to the meeting, which may be reduced if decided by the CoC, and the meeting shall be quorate if members representing at least 33% of the voting share are present
|The notice period shall in any case, not be less than 24 hours, or where there is an AR, 48 hrs.
The quorum is only determined on the basis of voting power, and not in number. Hence, where majority dues are held by only 1 FC, the meeting can be conducted with only 1 FC- this is very counterintuitive, and the same cannot be the intent of law.
Hence, a meeting may be quorate if members representing at least 33% of the voting power, not being less than 2 is number, are present.
Further, the law remains silent on the participation of the CD in such CoC meetings – whether the CD has the right to attend, or is required to mandatorily attend the meeting as an invitee is not provided for.
|Resolution Plan||Section 54K, read with Reg. 42 to 47||Section 54K requires the CD to submit a ‘Base Resolution Plan’ to the RP within 2 days of PIRP Commencement Date.
The CoC may require invitation of resolution plans from outsiders where –
(a) The CoC does not approve of the base resolution plans; or
(b) The base resolution plan impairs the rights of the OCs.
In such cases the RP shall, not later than 21 days from the PCD, float an invitation, therein mentioning –
(a) Basis for evaluations;
(b) Last date for submission of plan;
(c) Basis for considering a plan significantly better than the base resolution plan;
(d) Tick size;
(e) Manner of improving a plan.
|As per timelines envisaged, the CoC shall consider the Base Resolution Plan in the first meeting of the CoC to be held within 14 days from PIRP Commencement Date (PCD), such that invitation from others, if required, can be floated within 21 days of the PCD.
The basis of evaluation shall be subject to several quantitative as well as qualitative.
“Significantly better” shall be determined by the CoC itself.
|Approval of Plan||Sec 54K (8) to (12), read with Reg. 48||A plan received from outsiders can only be considered by the CoC, if the same is “significantly better” than the base resolution plan.
If no plans are received, the base resolution plan may be conducted.
The RP may also provide an opportunity to the submitters to improve their plan, by increasing their tick size, evaluation score etc.
The resolution plan having higher score on completion of process of improvement under sub-regulation (4) shall be considered by the committee for approval
|It is understood that while the CoC shall invite for plans where the OCs interests are impaired, no such provisions seems to be in place from plan submitted by others – they are only required to comply with section 30 (2) of the Code.
(Submission of Plan to NCT)
|Submission of Resolution Plan to unrelated FCs||Sec 54L, read with Regulation 49||Resolution plan, upon approval by CoC shall be submitted to the AA, not later than 90 days of PCD.
The resolution professional shall, within seven days of the order of the Adjudicating Authority approving a resolution plan, intimate each claimant, the principle or formula, as the case may be, for payment of debts under such resolution plan.
Where no resolution plan is approved by the committee or where the committee has approved the termination of process, the resolution professional shall file an application in Form P13 to the Adjudicating Authority for termination of process.
|Along with the resolution plan, the RP shall also submit a compliance certificate to NCLT in Form P-12.
The time period within which the application for termination, if so required. Shall be filed, has not been prescribed.
|Others||Meetings and Communication||Reg. 3||The meetings required under these Regulations may be held either in physical or electronic mode or in a combination of both; and all communications required under these Regulations shall be made by electronic means as far as possible.|
|Essential Supplies||The essential goods and services referred to in sub-section (2) of section 14 shall mean-
(c) telecommunication services; and
(d) information technology services,
to the extent these are not a direct input to the output produced or supplied by the corporate debtor
|PIRP Cost||Sec 5 (23C) r/w
|PIRP is an exhaustive list including cost of raising interim finance, fee payable to IP, costs incurred in running the business of the CD (in case of shift from DIP to CIP), fee payable to the AR of class of creditors, and such costs directly related to the PIRP process, and approved by the Committee||Section 5 (23C) (b) specifically provides that only the fee payable to the IP during the PIRP process, that is, after the order of the AA admitting the application for PIRP shall form part of PIRP Cost, whereas section 54B (3) provides that where an application is admitted, the fee of the IP during the pre-NCLT stage shall also form part of the PIRP Cost.
Hence, the provisions seem to be overlapping as regards the fee of IP during pre-NCT stage.
Further, the law is ambiguous w.r.t. treatment of other costs incurred during the pre-NCLT stage
Hence, PIRP cost must be widened to cover the costs incurred on and form the date of approval by the FCs.
|Access to Books||Reg. 9||The resolution professional may access the books of account, records, and other documents to the extent relevant for discharging his duties under the Code, of the corporate debtor held with-
(a) members, promoters, partners, directors and joint venture partners of the corporate debtor;
(b) professionals and advisors engaged by the corporate debtor;
(c) depositories of securities;
(d) registries that records the ownership of assets; and
(e) contractual counterparties of the corporate debtor.
|Appointment of Professionals||Section 54F (3) (e) read with Reg. 10.||The resolution professional may appoint a professional for assistance with respect to the PIRP process||The RP shall not outsource his/ her primary functions|
|Disclosure of Costs||Reg. 11||The RP shall make disclosures at the time of appointment and, thereafter, in accordance with the code of conduct as set out in the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016.|
|Preservation of Records||Reg. 12||The RP shall preserve a physical as well as an electronic copy of the records relating to the process of the corporate debtor as per the record retention schedule, as may be required by the Board in consultation with insolvency professional agencies||The Board shall issue a circular providing for the manner in which the records of the PIRP shall be preserved.|
 For a detailed analysis on the Ordinance, see “Packed with ifs and buts – Will Prepacks have any Takers
 Inserted vide the Ordinance
 Inter-alia Reg.3, 14 (2), 14 (3)
 In Form P7 of the Prepack Regulations