The Indian Restructuring Growth Story
According to the latest World Bank annual ratings, India is ranked 63 among 190 economies in the “ease of doing business”. In 2021, the Global Innovation Index ranked India 47th in “ease of resolving insolvency”, a position that has remained unchanged since 2020. The Government has been putting in efforts to enrich the insolvency regime with globally tested and innovative options and features and central to this was the introduction of the pre-packaged insolvency resolution process (“PPIRP”) within the ambit of the more than 4 years old Insolvency and Bankruptcy Code, 2016 (“Code”).
The entities being given the PPIRP option are the micro, small and medium enterprises (“MSMEs”) having outstanding operational and/or financial debt of more than INR 10,00,000. Introduction of an alternate mechanism for insolvency and debt restructuring other than the corporate insolvency resolution process (“CIRP”) became more important due to suspension of initiation of CIRP for defaults less than INR 1 Crore. CIRP was suspended to circumvent the effect of the coronavirus pandemic and subsequent lockdowns which heavily affected business viability, continuity and profitability. These businesses were otherwise presumed viable but for the pandemic. Liquidation of these entities was not in the interest of the stakeholders which include shareholders, creditors, employees, suppliers, and customers – and the economy.
In a move to ensure timely restructuring and resolution of this stress and otherwise as well, PPIRP was aimed to provide MSMEs a mechanism to restructure their liabilities while providing adequate protections so that the system is not misused to avoid making payments to creditors. The theme was to enable a “debtor-in-possession” regime while drifting away from the “creditor-in-control” regime as envisaged under the CIRP framework. However, even after completing 3 financial quarters, not more than 2 applications have been admitted by the National Company Law Tribunals (“NCLT”) for initiation of PPIRP.
Probable Reasons for Reluctance in putting the PPIRP Framework to Use
The PPIRP framework aims to put the “debtor-in-possession” by allowing the existing management of the MSME to run its operations while the process reaches conclusion. The sword of cutting the control keeps hanging loose because the committee of creditors (“CoC”) by 66% majority vote may approach the resolution professional (which has been made the body to only oversee the process otherwise) at any time and resolve to vest the control of the corporate debtor with the resolution professional. For PPIRPs initiated for default of more than INR 1 Crore, the PPIRP process can, at any time, be converted to CIRP by approval of 66% vote of CoC and then the NCLT.
The swiss challenge method incorporated in the PPIRP framework allows acceptance of competing resolution plans from any third party for the distressed MSME. Consequently, making the MSME to match-up the offer or forego its business set-up.
From the perspective of the lenders too, perhaps the PPIRP regime is not very attractive as it allows the defaulting promotors to remain in control.
On the implementation front, PPIRP will be met with the same challenges of scarce judicial time that CIRP and other aspects of the Code are currently facing. Indian judicial system has time and again seen schemes fail as while they are attractive on paper, lack of judicial resources for timely and effective implementation cripples the mechanism.
Having stated the above, PPIRP being an economic experiment in improving restructuring options for businesses is still awaiting the test of time. The force majeure situation which brought about introduction of this mechanism has been the new normal. It again remains to be tested for how creditor trust is achieved by these businesses which have yet not met the facets of new normal and whether there is a need for India centric out-of-the-box idea to handhold and restructure viability of such businesses.