top of page

Prepacked Insolvency and CIRP- A comparative analysis

IBC scholars/experts are glorifying the newly introduced Pre-Packaged Insolvency Process (PPIRP) in the Insolvency and Bankruptcy Code, 2016 (Code), which came into effect on the 4th of April, 2021. All most all of them are praising the water-tight provisions of the Pre-packaged Insolvency and its time-bound procedures, some of them even recommended that these Processes should not be limited within the MSME sectors. While most of them are praising about the efficiencies of the PPIRP when compared to the provisions of the Corporate Insolvency Resolution Process (CIRP), I am sceptical about the lacunae and the impracticalities of this process which none of them has ever raised. In this article, the author is trying to examine a lacuna existing in the provisions of PPIRP which might lead to a major abuse of law.


Overview of CIRP:

CIRP is a formal process for resolving the insolvency of a corporate debtor. It begins with the filing of an Application by the Financial, Operational or Corporate Debtor (CD) themselves under Sections 7,9 and 10. On admission of this Application, an Interim Resolution Professional (IRP) is appointed by the Adjudicating Authority, who takes control of the affairs of the corporate debtor. He/she will step into the shoes of the suspended management and makes it a going concern, he/she will form a Committee of Creditors and has to comply with the duties as prescribed under the provisions of the Code. This IRP if approved by the Committee of Creditors is reappointed as Resolution Professional (RP). The RP then conducts a detailed investigation of the financial affairs of the corporate debtor and invites a resolution plan from prospective resolution applicants submit the same to the Committee of Creditors (CoC) who vote on it. If the plan is approved by the CoC, it is then submitted to the Adjudicating Authority for final approval. If the Adjudicating Authority approves the plan, it becomes binding on all parties.


Overview of PIRP:

Pre-packaged Insolvency is a new concept introduced into the world of the Insolvency and Bankruptcy Code. It is a process of resolution where a base resolution plan is prepared in compliance with Section 30 of the Code and negotiated by the Corporate Debtor and the CoC before the commencement of the insolvency proceedings. An Interim Resolution Professional is appointed by the Corporate Debtor with the approval of the CoC beforehand the commencement of the PPIRP. After complying with the Code and the Regulations specified for this process, the CD approaches the Adjudicating Authority wherein a decision regarding the Approval or denial of the Resolution Plan is made by the Adjudicating Authority within a time frame of a maximum of 120 days.


ANALYSIS:

The sub-committee of the Insolvency Law Committee delineated the following three principles that should guide the design of the pre-pack framework:


  1. the basic structure of the Code should be retained;

  2. there should be no compromise of the rights of any party;

  3. and the framework should have adequate checks and balances to prevent any abuse.


While it can be contended that the PPIRP satisfied the first two principles, in my opinion, the third principle is not fully satisfied. Hon’ble Apex Court and the Adjudicating Authorities in a catena of judgements have directed the courts/Tribunals to ensure that the Code is not misused. The Hon’ble NCLT, Principal Bench in the matter of Talha Yunus Sareshwala vs Parsoli Motor Works Pvt Ltd & Ors.[1], held that “the Court /Tribunal has to ensure that the Code is not being used by perverted human ingenuity and to protect against distortion and abuses.”


Insolvency and Bankruptcy Code, 2016 comes up with a Resolution plan which is designated to be the “way-out” for insolvent entities coming under the Insolvency and Bankruptcy Code, 2016.[2] While we cannot ignore the fact that some of the Corporate Debtors or Promoters or the management are thinking of utilising the provisions of IBC to extricate themselves from the liabilities and the accompanying harshness of law, fortunately, to their hard luck the legislators have incorporated Section 29A into the Code wherein the “connected persons” are held to be not eligible for submitting a Resolution Plan.[3]


While this provision limits the Promoters and other connected persons from the submission of the Resolution Plan in CIRP, PPIRP is glorified for having the exact opposite of this provision. Explanation I of Section 54K states that “for the removal of doubts, it is hereby clarified that, the corporate debtor being a resolution applicant under clause (25) of section 5, may submit the base resolution plan either individually or jointly with any other person.”[4]


Some legal analysts and scholars claim this to be an efficient way as the erstwhile management knows the best interest of the CD, I am concerned about the high risk of fraud, abuse and distortion that could happen under this pretext. Unlike the CIRP, Corporate Debtor is the one who initiates the PPIRP[5] after complying with the pre-commencement period compliances. During this pre-commencement period, the Corporate Debtor shall with the consultation of the IRP and on the approval of 66% of the CoC prepares a Base Resolution Plan which shall comply with Section 30 of the Code. This Base Resolution Plan is then submitted to the Resolution Professional on the admission of the PPIRP[6] and if the Resolution Professional fails to bring in any new plan or a plan which is more efficient than this Base Resolution, then according to the provisions of the PPIRP Regulations, the Base Resolution Plan may be approved by the Adjudicating Authority.


On the approval of this Base Resolution Plan as the Resolution Plan, by the provisions of Section 31 of the Insolvency and Bankruptcy Code,2016, the order of the Adjudicating Authority shall be binding on the Corporate Debtor, its employees, members, creditors, including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force is due, guarantors and other stakeholders involved in the Resolution Plan. The relevant extracts of Section 3l of the IBC, 2016 are as follows:

"

31 (1) - If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors under subsection (1) of .section 30 meets the requirements as referred to in sub-section (2) of section 30, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any plan for the time being in force, such as authorities to whom statutory dues are owed, guarantors and other stakeholders involved in the resolution plan. "


Therefore, it can be contended that the management of the CD who is well versed with the entire structure of the CD can misuse the provisions of the Code with or without the help of the Financial Creditors and thereby retain the CD without its past liabilities. Moreover, according to Section 54A (2)(a), the limitation period prescribed by the legislators for initiating PPIRP is 3 years after the PPIRP or CIRP of the CD, therefore this management who took over the control of the CD can again initiate the PPIRP again after 3 years and the same saga can be continued in a loop.


We cannot ignore the fact that the legislators have included Section 54J (2) wherein it is explicitly stated that the management will be vested with the Resolution Professional if the AA on an Application made by the RP is of the opinion that the affairs and management of the CD are conducted in a fraudulent manner and that the base resolution plan put forward by this management shall not be accepted. [7] But the chances of RP ascertaining these frauds are low due to the strict timelines prescribed and the limited role and powers of the RP under the Code for PPIRP.


In conclusion, both CIRP and PIRP have their advantages and disadvantages. While CIRP provides for a fair and transparent process and aims to maximize the value realization for all the creditors, PPIRP can be exploited by the management of the CD themselves in order to defraud the creditors and thereby retain the CD with less or zero liabilities.



Kesiya Biju B.Com, LL.B Advocate


(Adv Kesiya Biju is an Associate of Artis Law House. The views expressed in the article are from author's perspective and not in the nature of advice or opinion)



Reference

[1] Talha Yunus Sareshwala vs Parsoli Motor Works Pvt Ltd & Ors., Company Appeal (AT) (Ins) No. 1115 of 2020 [2] Harshit Mishra, Role of Promoters under IBC, https://ibclaw.in/role-of-promoters-under-ibc-by-harshit-mishra/ [3] Section 29A of Insolvency and Bankruptcy Code, 2016 [4] Section 54K of Insolvency and Bankruptcy Code, 2016 [5] Section 54C of the Insolvency and Bankruptcy Code, 2016 [6] Section 54K (1) of the Insolvency and Bankruptcy Code, 2016 [7] Section 54L (4) of the Insolvency and Bankruptcy Code, 2016

1 comment

1 Comment

Rated 0 out of 5 stars.
No ratings yet

Add a rating
Guest
Jul 11, 2023
Rated 5 out of 5 stars.

Sweet

Like
bottom of page