THE PITFALLS OF PRE-PACKAGED INSOLVENCY RESOLUTION SCHEME IN INDIA

The newly introduced scheme of Pre- Packaged Insolvency Resolutions for Micro, Small And Medium Industries (hereinafter “MSME”)in India has been perhaps introduced for slashing down the covid-induced stress faced by much emphasized small entrepreneurial ventures and upon the default of Rs. 10 Lakh or more, the process may be triggered by the distressed Corporate Debtor (hereinafter “CD”) after getting approvals from 66 percent of the unrelated Financial Creditors (hereinafter “FC” or “FC’s”). The Base Resolution Plan (hereinafter “BSR”) is required to be approved by 66 percent of FC’s before the formal initiation of the process with the Adjudicating Authority, i.e.National Company Law Tribunal(hereinafter “NCLT”)which must be done within 90 days of the abovesaid approval. Thereafter NCLT must within 30 days approve or reject the plan and the process is thereafter closed and only in critical cases of adverse management, rules provide for ordering of liquidation directly. In crucial circumstances, the RP may apply for vesting of management in his hands as he is simply otherwise facilitated by the CD in relation to his duties under the process as the entire scheme is predominated by Debtor centric approach.

Analysis would reveal that the watertight rules framed for preventing the backdoor entry of the promoters might even prove futile to the very objective of framing an efficient alternative insolvency resolution framework for MSMEs. The scheme is meant for restructuring with Financial Creditors only as the BSR is mandated to have no stance for the impairment of Operational Creditors (hereinafter “OC”). In view of the fact that certain other schemes for financial restructuring do exist in Indian economy, the traditional and specific bar of disqualifications of section 29A of the Insolvency and Bankruptcy Code (hereinafter” IBC”) might throttle this alternative remedy. The only relaxation to the promoters is in relation to the section 240A of IBC whilst the other filters of section 29A are unfortunately patched onto the present framework. The relaxations for wilful defaulters could have been carved out herein to make them eligible as resolution applicants and this move could have been a real breather to such promoters who have been recklessly classified as wilful defaulters by Banks in these stressful times. It is worth to mention here that the Indian bankers never vacillate in declaring such wilful default classifications without mulling over the deep-rootedconsequential concerns that they might face.

The borrowers may not even prefer to avail this remedy perhaps because of the fact that the control and management of the CD may anytime slip/vest with RP. Also, the BSR even after getting two fold approvals from creditors is subjected to their discretions for final approvals and no mandate to approve the Fully complaint-BSR is provided in the scheme. The promoters in the name of restructuring or resolution face the constant hazard of losing their entity which they have been nourishing for years and this fear might resist the promoters from availing this course or pre-packaged resolution which might just pack off their character in their entity forever.

The OCs are required to be compensated in full in the BSR and even the statutory OCs have been implicated in the beneficiary regime, few exemptions to the list might augment the interest of promoters towards the scheme. Also, the provisions for dilution of equity poses a danger for loss of control of existing management to the hands of creditors and thereby adds up to the list of pitfalls.

Also,existing restructuring schemes or the other rampant measures being taken in the resolution of stressed assets in recent RBI circulars and policies(Resolution Framework 2.0 or 1.0) might prove to be a better corporate rescue in comparison to this scheme. These schemes though are limited in their nature or scope but the kind of uncertainty of control which is exposed herein certainly would disincentivise the MSMEs promoters. The Creditors are free to initiate the traditional insolvency resolution process at any time during the scheme despite the fact the Swiss Challenge has been sufficiently incorporated to ensure the value maximisation of the entity. The volksgeist of the framework suggest that the promoters cannot not have a clean slate and since their identity is dented with suspicion, the checks and balances of the framework have rendered the spirit of the scheme as infructuous.

This move of pre-packaged could have been a much bolder one with more inclusions or relaxations for keeping intact the original intention of debtor-in-possession. Since the grapevine also suggests that the scope of the scheme may then be extended to conglomerates, It may be therefore presumed that all these anomalies would pop out naturally and the matured version of the framework might brew to the success of Indian insolvency regime.

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