Pre-pack insolvency may get a facelift

Lack of response to the MSME scheme forces review

MSMEs, Pre-pack insolvency, msme scheme
The review may result in a higher amount of protection for financial creditors from post-resolution scrutiny and a longer time-frame for completion of the resolution process, according to sources.

The government and the insolvency regulator are planning to rework the so-called pre-pack resolution scheme for micro, small and medium enterprises (MSMEs) to make it more attractive after the scheme failed to gather much interest among debtors and creditors.

The review may result in a higher amount of protection for financial creditors from post-resolution scrutiny and a longer time-frame for completion of the resolution process, according to sources.

The move came amid finance and corporate affairs minister Nirmala Sitharaman flagging the tepid response to the scheme. Only two insolvency cases – Delhi-based Loon Land Developers and Ahmedabad-based GCCL Infra-structure & Projects — have so far been admitted under the pre-pack programme, which came into force in April 2021.

The sources said that rules and regulations relating to the pre-pack scheme are being reviewed and suitable changes will follow. Also, a campaign to raise awareness about the scheme among both debtors and creditors are expected to be launched.

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The sources said lenders are not enthused by the pre-pack framework, as they fear any decision on the admission of a case or the voluntary haircut by them under the scheme may lead to subsequent scrutiny or investigations. Even if no foul play is involved, the process of defending the decisions already taken by them may turn out to be costly and time-consuming. It doesn’t make for an attractive proposition, more so when the assets involved are not large enough to take any such calculated risk.

The scheme allows only the debtor to trigger its own bankruptcy process with the approval of financial creditors having at least 66% of voting power. Promoters who are not wilful defaulters are allowed to submit a base plan for resolution, which will then be put to competitive bidding through Swiss challenge. However, in cases where operational creditors are not required to take a haircut, the promoter’s plan, backed by the two-thirds of financial creditors, can be presented before the National Company Law Tribunal (NCLT) for clearance (without the need for Swiss challenge).

The fears override the appeal of some of the attractive features of the scheme, formulated with an intent to help resolve stress in MSMEs fast. Pre-pack resolution plans have to be submitted in only 90 days and the NCLT will have another 30 days to approve them. The IBC currently stipulates a maximum of 270 days for the completion of the CIRP.

Given that cash-starved MSMEs have limited wherewithal to go through a long and rigourous insolvency process, the government had introduced the compact and debtor-driven pre-pack scheme under the over-arching Insolvency and Bankruptcy Code (IBC).

Since the resolution of large assets under the CIRP in the past was delayed mainly due to litigations initiated by defaulting promoters, the government had assumed that a debtor-driven pre-pack process and a reduced time-frame will remove fears of such a delay and draw creditors. However, the situation didn’t turn out as intended.

Last week, commenting on the pre-pack scheme, Sitharaman had said: “I still find that the wings that are so necessary for the bird to fly are still not there. The scheme has still not taken off (at the desired manner),” she said.

Jyoti Prakash Gadia, managing director at consultancy firm Resurgent India, said procedural delays can undermine the purpose of the pre-pack scheme. “Tight timelines, specifically the 90-day window allowed under section 54D(2), make it difficult to resolve cases. Financial creditors must have internal guidelines in place and need to take proactive measures while initiating pre-pack insolvency resolution scheme (PIRP),” he said. Furthermore, without a deadline extension, the PIRP may fail in respect of a number of CDs. With the automatic initiation of liquidation in section 54L(4), the CD and its stakeholders may not have a reasonable shot at reviving the business – something that might have been offered through CIRP. “However, it will save considerable time and resources before initiating the liquidation, where no possible resolution is envisaged,” Gadia said.

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First published on: 10-10-2022 at 06:30 IST