‘Watertight rules to prevent promoters’ backdoor entry might prove futile to objective of Pre-Pack scheme’

The scheme has been notified with the idea that it is the prerogative of MSMEs to have an alternative debt resolution mechanism considering their unique nature of informal markets.

The newly introduced scheme of Pre-Packaged Insolvency Resolutions for Micro, Small and Medium Enterprises (MSMEs) in India has been perhaps introduced for slashing down the Covid-induced stress faced by much emphasized small enterprises and upon the default of Rs 10 Lakh or more, the process may be triggered by a distressed Corporate Debtor/Company after getting approvals from 66 per cent of the unrelated lenders. A Base Resolution Plan is required to be approved by 66 per cent of lenders before the formal initiation of the process with the National Company Law Tribunal which must be done within 90 days of the above said approval. Thereafter, the tribunal must within 30 days approve or reject the plan, and only in critical cases of adverse management by promoters, rules provide for ordering of liquidation directly.

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Operational Hurdles

The Resolution Professional may seek vesting of management of the company under Resolution in his hands even though the entire scheme is predominated by Debtor centric approach and such event is triggered only in exceptional circumstances, however, still, it may be a turn off for the MSMEs. Gigantic efforts are required to avail the scheme and all of them might get redundant as the Resolution Plan, even after getting two-fold approvals from creditors, is subject to final approvals. This loophole needs an immediate correction for encouraging the participation of MSMEs.

Objective- Not Objectively Achieved

The scheme has been notified with the idea that it is the prerogative of MSMEs to have an alternative debt resolution mechanism considering their unique nature of informal markets. But, the analysis would reveal that the watertight rules framed for preventing the backdoor entry of the promoters might even prove futile to this very objective for MSMEs as the promoters in the name of restructuring or resolution face the constant hazard of losing their entity which they have been nourishing for years. 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. Also, the provisions for dilution of equity pose a danger for loss of control of existing management to the hands of creditors which is not so striking feature of the framework.

Stressing the Stressed

The scheme fails to strategize the real financial distress as a limited scope is provided for restructuring with the financial creditors, which majorly includes banks and financial institutions. The Resolution Plan is mandated to have no stance for the impairment of Operational Creditors such as suppliers of goods and services and hence, in every distressful situation, the MSME is required to clear off the dues of these creditors. Unfortunately, the government dues as well have been implicated in the beneficiary regime. Few exemptions to the list might augment the interest of promoters towards the scheme. Also, creditors herein 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.

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Inefficacious Bars

Moreover, the traditional and specific bar of disqualifications of section 29A of the Insolvency and Bankruptcy Code is unfortunately patched onto the present framework which might just throttle this alternative remedy with full vigour. It is imperative to note that specific relaxations for MSME promoters who are declared as wilful defaulters could have been carved out herein to make them eligible as resolution applicants. 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 mentioning here that the Indian bankers never vacillate in declaring such wilful default classifications without mulling over the deep-rooted consequential concerns that they might face.

Pre-packs vs other Schemes

The above-mentioned reasons would form a good ground to stress the already stressed MSMEs to look for other viable options of financial restructuring which exist in the Indian economy. This includes the recent RBI circulars and policies (Resolution Framework 2.0 or 1.0) and the One-time Settlement schemes etc. might prove to be a better corporate rescue in contrast with this one. The other 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.

Conclusion

The volksgeist of the framework suggests that the promoters cannot 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 infructuous. This move 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 the Indian insolvency regime.

Anjali Jain is the Partner at law firm Areness. Views expressed are the author’s own.