July 30, 2021
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Resolution ‘Pre-Packs’
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Good morning. Remember an ad where a school kid initiates moving a broken branch that causes traffic and then everyone joins him? These children in Odisha will remind you of that small kid.
As roads remained damaged, few children from Bagamara village in Bhadrak district took it upon themselves to construct the road. They were seen voluntarily doing this to better the place. While their action has garnered praise, it also put the district administration to shame.
📰 FEATURE STORY
The Insolvency and Bankruptcy Code (Amendment) Bill, 2021
We all lend and receive money and goods on credit to achieve our dreams. Sometimes, due to personal loss or macroeconomic issues, we are pushed to close down our companies, industries and institutions. Whether we are a debtor or a creditor, the loss we suffer is difficult to fathom. To help us arrive at a common conclusion and take the best possible measures, the government brought in the Insolvency and Bankruptcy Code in 2016.
Insolvency is a situation in which an individual or company is not able to pay the outstanding debt. Ever since this came into existence, there have been several amendments to it. Recently, the Lok Sabha passed Insolvency and Bankruptcy Code (Amendment) Bill, 2021. The bill provides for a Pre-packaged Insolvency Resolution Process (PIRP) for stressed MSMEs, with the default limit not exceeding 1 crore. While this would speed up and better the insolvency process, experts have voiced out concerns regarding a reduced time frame and less transparency in terms of agreements.
Context
‘Too many cooks spoil the broth’. This rings true in the case of past debt restructuring laws. Earlier, there were multiple laws of such kind which were not very efficient. In most cases, these prolonged the duration of the process and often resulted in the depreciation of the assets. To tackle this issue, the Indian government introduced a single law – The Insolvency and Bankruptcy Code in 2016. Under this law, the National Company Law Tribunal (NCLT) was made the adjudicating body for the process of insolvency.
This code brought in a new system called ‘Corporate Insolvency Resolution Process (CIRP)’. Under this system, a debtor or creditor could apply for insolvency. The default amount should be at least ₹1 lakh. Then, a committee of creditors will be organised and they will provide a resolution plan. These affairs will be managed by an individual called a resolution professional (RP). In case you are wondering what kind of resolution will be passed, it will typically be a merger, restructuring of the company or acquisition. If no resolution is arrived at, the company will be dissolved. This plan has helped the government recover more than ₹5 lakh crore of debt that was not possible before.
Within a span of five years, several efficient changes were made to the law. However, the insolvency process was suspended until April 2021 due to the pandemic. In April, an ordinance was passed which introduced a new insolvency mechanism called ‘Pre-packaged Insolvency Resolution Process (PIRP)’. On Wednesday, the government passed a bill in Lok Sabha that will replace this order.
This enables the PIRP initiation for Micro, Small and Medium Enterprises (MSMEs) with defaults up to ₹1 crore. The pre-packaged insolvency resolution process has a lot of benefits. The government claims that it will make the process more efficient. On the other hand, critics assert that the process has potential downsides.
Benefits of the PIRP
Pre-Packs are generally where the debtors and creditors collaborate on a common agreement and then submit a resolution plan. This plan is already in practice in many countries including the US and UK. The government says that pre-packs will be introduced mainly for the MSMEs. Since most companies and firms are badly hit by the pandemic, pre-packs will help them restructure their liabilities. It will also protect the creditors from debtors who could misuse the system and avoid making payments.
Now that we know about CIRP, we will compare PIRP with CIRP and understand the benefits the new process will bring.
In CIRP, a debtor or creditor applies for insolvency with the NCLT. Then a committee is formed which analyses the issue at hand and comes up with a resolution. The resolution is submitted and the process is initiated by the court. On the other hand, in PIRP, only the debtor can apply for insolvency. Before applying for insolvency, the debtors must have a resolution plan that is supported by a minimum of 66% of their financial creditors. Then a committee will analyse it and accept or invite resolution plans from outsiders. This plan should be accepted by at least 66% of the committee members.
Now, let’s take a look at the number of days allotted. The CIRP scheme should take place within 330 days including 60 days for the NCLT to decide. But under the new process, the resolution plan should be submitted within 90 days and NCLT should either approve or terminate the process within 30 days.
This is a major feature of the pre-packs plan. This is because the CIRP was majorly criticised for the time taken to provide a resolution. While 270 days are given for the resolution proceedings, around 79% of the proceedings have already crossed the limit under CIRP. Notably, the number of days in pre-packs is only 1/3rd of the CIRP. Therefore, the process will take place at a faster pace, ensuring that the asset value does not depreciate.
This process ensures that the debtor files for insolvency with a proper plan in hand. Therefore, it will considerably reduce the burden on the law tribunal. Another key factor is that in PIRP, the debtor has control over the case. In CIRP, a resolution professional will have control over the debtor, representing the financial creditors.
Additionally, it lays down a few rules and plans to make sure the debtor doesn’t submit an impaired resolution. One, the bill states that if there is any fraudulent conduct, the management will be shifted to resolution professionals and a penalty will be imposed. Second, it allows for a mechanism called the ‘Swiss Challenge’. Under this, any third party will be permitted to submit a resolution, based on which the applicant would have to then improve the original resolution or forgo the investment. This way the resolution will be balanced and it safeguards the creditors from any misused provision by the errant debtors.
Drawbacks and Challenges of the PIRP
While PIRP ensures the fast and smooth process of resolution procedure, experts opine that these very features act as drawbacks of the plan. First, let’s see what are the criticisms of PIRP in other countries that have already adopted it.
A review by Wolverhampton University identified one major criticism. Since the agreement is made between the debtors and financial creditors, they do not go for public bidding. While this speeds up the process, there is a heightened suspicion that the maximum benefit might not be received due to the absence of public bidding.
Now, experts in India point out one major drawback. So, under the IBC, there are two types of creditors.
- Financial creditors – Those who are in contact with the debtors for only financial concerns, like loans.
- Operational creditors – Those who have provided operational debt in the provision of goods or services.
Most of the insolvency cases applied so far are majorly applied by Operational creditors. However, the pre-packs focus on the agreement between debtors and financial creditors. This means the operational creditors have less to no say in the decision-making process. This betrays the operational creditors as they are mostly sidelined.
You might agree that courts are there to facilitate the issues between two parties smoothly. Therefore, experts say that encouraging informal agreement and submitting only the resolution in the court might be a major setback. The process has turned towards private negotiations to reduce the burden on courts. While this is not wrong, it might lead to less transparency and might often end up creating more distress.
A major hurdle in the pre-packs could be the timeline given. While there is a belief that a lesser number of days hint at fast processing, experts disagree. With only 90 days in hand, experts say it will be very difficult for both lenders and distressed firms to arrive at an agreement. They also say it will add more pressure on the resolution professionals.
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🏴 STATE OF THE STATES
Green roads (Punjab) – Long road travels are tiresome and boring. Especially, if there are no trees around you, the scorching heat will bother you very much. So the Punjab Forest Department has decided to go easy on us by planting more trees on the national highways. Along with the National Highway Authority of India, they will now plant 1,36,842 saplings on five National Highways in Punjab. This means the roads will now be more aesthetic and pleasant for journeys.
Skating genius (Manipur) – Breaking Guinness World Records is the dream of many people. It is a huge achievement to be listed in the records and be known the world over. The 13-year old Manipur boy, Tiluck Keisam brought pride to his state by entering the list with his wonderful skating skills. He is now famous for completing the most number of cartwheels on roller skates within one minute. By doing 42 cartwheels, he broke the previous record of 30 cartwheels in a minute by a 27-year old Londoner. With our enthusiastic youth, India is on the path to break more records.
Lost hero (Jharkhand) – In an unfortunate hit-and-run case, Judge Uttam Anand lost his life yesterday. The sad news comes with suspicion as CCTV footage suggests foul play. The video shows that he was deliberately hit by a vehicle in broad daylight. A mysterious man was spotted in the location before and after the incident. Since Judge Uttam was handling the bails of gangsters, it is possible that he was intentionally killed for rejecting a bail. The case has now been taken up by the Jharkhand High Court. Like always, we wish that justice prevails.
Welfare scheme (Telangana) – While Dalit welfare schemes are being offered by the government, there are many difficulties in availing them. From lack of awareness, technical challenges to problems with middlemen, the benefits are hard to access. But the Telangana government has promised to allocate ₹80,000 crore to ₹1 lakh crore on the Dalit Bandhu scheme. They have assured that the funds will be directly transferred to the beneficiaries and they will not have to repay the money. The eligible SCs are being encouraged to avail the benefits and make wise investments.
Big relief (Maharashtra) – Parents in Maharashtra heave a huge sigh of relief as the Maharashtra government has approved a 15% reduction in school fees for this year. The exorbitant fee rates charged by schools made the parents weary during the pandemic. So, this move by the government is welcomed dearly by everyone. Budget-friendly education is certainly the way to go.
🔢 KEY NUMBER
$10 million – Venture capital fund announced by Kalaari Capital-backed CXXO to support startups with female founder CEOs. Hope this will encourage many more inclusive startups in India in the coming years.