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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