Page 47 - Banking Finance October 2022

ARTICLE

If AA approves, PPIRP is completed and resolution plan
Conclusion:
will be implemented
The introduction of the Pre-Pack insolvency for the MSME
If not, AA to pass order of Termination of PPIRP has fortified the Indian Insolvency Resolution Framework.
It serves to promote the IBC objectives in achieving steady
30 days' time frame for AA to pass above orders from
and smoother resolution of the distressed organization.
the date of receipt of application
While currently the Pre-Pack is limited to Micro, Small and
Challenges and Drawbacks/Concerns:
medium enterprise, the Government plans to roll out it for
TRANSPARENCY: The success of Pre-Packs shall greatly other Corporate as well. The success and the failure of
depend on the transparency with which the existing MSME Pre-pack should be kept into consideration while
management works coupled with the role played by the drafting the Pre-pack scheme for other Corporate.
Resolution Professional. The approach of both the
creditor and the debtor to operate, in the best interest Pre-packed deals are new in India, whereas in countries such
of the company is required to be ingrained in the as the UK and the US, such deals are common. This newly
working of various stakeholders. introduced framework for MSMEs, inter alia providing for
quick and cost-effective resolution, may fairly be expected
APPROVAL OF THE ADJUDICATING AUTHORITY/ NCLT:
to further strengthening both the financial and operational
Under the Ordinance, the Resolution plan does not
position of MSMEs, importantly under the prevailing Covid-
attain finality, even after the consent of 66% of the
19 crisis.
Financial Creditors, until the Adjudicating Authority/
NCLT approves it. Such approvals are not only time
MSME borrowers can retain control of the firm and
consuming but also results in an element of uncertainty
negotiate a settlement with lenders without going through
being cast on the process of the entire pre-pack scheme.
the entire IBC process that saves time and money. Further,
Such an element of uncertainty gravely prejudices the
adopting a plan evaluation process akin to the Swiss
success of a Pre-Pack.
Challenge retains competitive tension such that promoters
Efforts for marketing of pre-pack companies for sale
propose plans with the least impairment to rights and claims
may be insufficient: The experience gained in other
of creditors.
countries like US, UK that the quality of marketing of
businesses that intend to pre-pack was very less. The
It is expected and emphasized that if the pre-pack system
evidence of research (in countries where adopted) is implemented well, it would lead to smoother
shows that where no marketing is carried out, pre-packs implementation of resolution plans, would promote growth
return less money to creditors. and keep the company as a going concern while retaining
Valuation methodology: The valuation may be limited jobs and ensuring creditors receive the funds due to them.
to certain assets, normally the assets and property, but Especially during these difficult financial times, it is
not the intellectual property or goodwill. More could imperative that such a system would only yield fruitful results
be done to explain the valuation methodology. and would have more pros than cons.
Concerns about due consideration may be given to the
The government needs to further augment the NCLT's
future viability of the new company or not.
infrastructure so that pre-packs can be implemented in time-
Current NCLT infrastructure may be insufficient to
bound manner. The government may consider setting up
handle the pre-packs resolution process. As it is
specific benches looking at pre-pack and insolvency above a
expected that, due to Covid, that a lot of companies
certain size to expedite the resolution of large cases in a
would be pushed into insolvency in the coming times
time-bound manner.
and lot of cases will be referred to NCLT.
Banks do not typically take many MSMEs to IBC courts As with any legislation, this Ordinance will also need to
as the loan value will be typically lower. Most IBC cases evolve as it goes along to address implementation issues
involve medium and large companies. that will arise.

BANKING FINANCE | OCTOBER | 2022 | 47