05 August 2021
[Interview] Pre-packaged Insolvency - Doing it the Indian Way
Many countries around the world have introduced changes to their insolvency laws in response to the unprecedent challenges brought about by the pandemic. India is no exception. In April, the pre-packaged insolvency resolution process (PPIRP) came into effect in the country, generating great excitement in and beyond India. We sat down with Dr Neeti Shikha who is Head of Centre for Insolvency and Bankruptcy at the Indian Institute of Corporate Affairs to explore more about India's unique pre-pack.
ABLI: Compared to the more popular US or UK style pre-pack, India's PPIRP is unique in its own right. If you could use only three key words to describe the process, what words would you choose and why?
Dr Neeti Shikha (NS): I would say "hybrid", "SME-compatible" and "process-heavy".
The PPIRP is a hybrid of the debtor-in-possession regime and the creditor-in-control model. It has tried to do a balancing act of keeping debtors in possession while giving the committee of creditors enough supervision and control by letting it vote on the approval of a restructuring proposal.
The PPIRP is dedicated to micro, small and medium-sized enterprises ("MSMEs"). To put it in context, India's Insolvency and Bankruptcy Code ("IBC") mainly caters to big corporations. Since MSMEs are unique and not all of them have a formal corporate structure, the PPIRP is at least theoretically a more suitable method for MSMEs.
Having said that, the PPIRP has become very process-heavy and there are doubts as to whether its intended policy objective of keeping the business rescue mechanism for MSMEs easy and informal can really be achieved. In fact, there has so far been no case that has benefited from the PPIRP to my knowledge granted that the scheme was introduced only in April.
ABLI: As you mentioned, the PPIRP is dedicated to MSMEs. What in your opinion are the reasons behind this?
NS: There could be several policy reasons for this.
First, the MSME sector was most vulnerable at the time when the PPIRP was introduced. Expecting MSMEs to go to courts to seek rescue would be detrimental both to them and to the courts since both parties suffer from capacity shortage. Further, a large number of MSMEs are left out of the corporate insolvency resolution process ("CIRP") under the IBC because the triggering threshold for that process is default of one crore INR (approximately S$183,000). This has resulted in a legislative vacuum in the insolvency framework for MSMEs.
I would argue that in piloting the PPIRP for MSMEs, the government was perhaps conscious of these limitations in terms of court capacity, the capacity of MSMEs to adopt CIRP under the IBC and the growing stress in the MSME sector.
ABLI: If you had the magic wand and could wish for the PPIRP to have one feature that is available overseas but not yet available in India, what will that be and why?
NS: India's pre-pack is unique because, as mentioned earlier, it caters to the Indian MSME scene. During the PPIRP, the National Company Law Tribunal ("NCLT") holds the authority of final approval and has immense discretionary power to re-open a pre-pack. We have seen that most delay in CIRP takes place at NCLTs. It is therefore important to issue some guidance notes on how such discretionary powers are exercised by NCLTs. An analogy may be drawn with the bankruptcy judges in the US who also possess immense discretion in the restructuring process of a debtor. Recent NCLT orders in the case of DHFL or 3’CHomes have contributed to growing distrust in NCLTs in India. The discretionary powers of NCLTs should therefore be regulated.
In addition, India's pre-pack insolvency framework may consider picking up the concept of impaired and unimpaired classes of creditors from the US and assign roles or voting rights to them accordingly. Specifically, the unimpaired class should have their claims repaid along with the interest promised and be required to give primary consent to a pre-pack. On the other hand, the right to object to a pre-pack at any stage of the negotiations should be extended only to the impaired classes of creditors.
Dr Neeti Shikha will be speaking at ABLI's webinar Rise of Pre-pack as Restructuring Tool – Global and Regional Perspectives on 9 September. She will be providing the audience with her unique Indian perspective alongside her colleagues Aurelio Gurrea-Martínez, Assistant Professor of Law, Singapore Management University, Debby Lim, Director, BlackOak LLC and Dan T. Moss, Partner, Jones Day.
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