Prolonging PPIRP Scrutiny: Crucial for Optimal Resolution?

21st October, 2024 - 6:40 am Categories: IBC 0 Comments

Introduction

The entire body of law in India for resolving bankruptcy affecting all entities, whether corporate or individual, is the Insolvency and Bankruptcy Code, 2016 (Code/IBC). It responds to the growing demand for an all-encompassing law that would be efficient in resolving debtors’ insolvency, optimizing the value of assets accessible for creditors, and facilitating the closure of unprofitable enterprises. Resolution is the Code’s primary goal. The second goal is to maximize the value of the “corporate debtor’s” assets.[i] Further, in addition to the process of CIRP, another alternative mechanism for micro, small, and medium enterprises (MSMEs) has been added to the Code through the Insolvency and Bankruptcy Code (Amendment) Act, 2021[ii] known as the Pre-Packaged Insolvency Resolution Process as Chapter III-A from Sections 54A to 54P. A different and quicker method of resolution for micro, medium, and small businesses experiencing financial difficulties is the pre-packaged insolvency process. It aims to resolve disputes more quickly, affordably, and with the most possible value while causing the least amount of disruption to ongoing business operations.[iii] After the start date, 120 days must pass until the resolution procedure is finished in its entirety.[iv] Under the pre-packaged insolvency process, default amounts between Rs 10 lakh and Rs 1 crore are initiated.

An informal agreement between creditors and debtors is permitted under the pre-packaged insolvency process, in contrast to the corporate insolvency process.[v] The informal understanding is the method by which financially troubled enterprises settle their debts before declaring bankruptcy. The informal proposal is approved by 66% of creditors, at which point the pre-packaged insolvency resolution process starts.[vi] The fundamental issue in this regard is the recent NCLT Ahmedabad Bench order on 6^th June 2024[vii] which stated that the Insolvency Code’s Section 54D[viii] lacks any provisions for extending the PPIRP Time Limit.

Various fundamental issues arise due to this order that need analytical deliberation. In this article, we shall attempt to put forth these issues structurally and provide possible solutions. The first and foremost issue is the order defeating the purpose for which PPIRP was brought into existence, the second issue is the unfettered exercise of powers by the NCLT merely on the grounds of time delay even while there is a willingness on the part of CoC to consider the PPIRP.

Navigating Established Legal Precedents

There have been various instances where the NCLT has extended the period for PPIRP. In the case of Shree Rajasthan Syntex Limited v. State Bank of India & Ors.,[ix] SBI sought an extension from the applicant to extend the deadline until July 15, 2023, and in response, the voting process was extended until July 10, 2023. Subsequently, the SBI once more asked the Applicant to extend the voting period to July 15, 2023, citing the Resolution Plan’s pending review by higher authorities. The PPIRP time was extended for 3 weeks beyond the term of 90 days as specified under Section 54D of the IBC, 2016,[x] along with an exclusion of 6 days, after the NCLT found that the application was accepted via order dated July 18, 2023. These facts and circumstances apply in the present case with a slight modification that is extremely negligible,[xi] further, in the case of the Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta & Ors.[xii] And PNB v. Jai Laxmi Sugar Products,[xiii] it was held that when the insolvency resolution procedure has less than 330 days remaining to be completed, it would be preferable for all parties involved if the corporate debtor was able to resume operations rather than being placed into liquidation. These cases are analyzed to highlight the role of NCLT in certain cases where extension has been provided analyzing the facts and circumstances.

Further, it is essential to analyze verdicts that define the powers and limitations of NCLT. In the case of Kolkata Municipal Corporation and another Vs. Union of India and others,[xiv] it is stated that the purview of Section 18(f)(vi) of the IBC[xv] defines and limits the NCLT’s authority as an adjudicating authority under Section 60 of the IBC.[xvi] This section of the IBC envisions an exercise of power that is under the definition of “arising out of or concerning the insolvency resolution”. In yet another verdict of Insolvency & Bankruptcy Board of India v. SBI,[xvii] it was highlighted that it is evident from a conjoint reading of the IBC’s provisions that the NCLT serves as the IBC’s adjudicating authority.[xviii] The sorts of cases that can be decided under Section 60(5)[xix] have been explicitly listed. The NCLT is not given the authority to decide whether the regulations created under the IBC are legitimate and lawful. Hence, stressing emphasis on the limited role of NCLT and limits its role to facilitation of the insolvency process.

Addressing the contentious facet of the order

Various facets need analysis in the verdict starting from the actions of the CoC taking into consideration the base resolution plan hence highlighting the decisiveness on the part of the CoC to consider the process of PPIRP. Since the process of PPIRP is a voluntary and informal one, it is important to give autonomy to the parties and not restrict them by placing a period. A fixed time frame for the process in its entirety takes away the party’s autonomy. For the process to be flexible, there must be flexibility with certain aspects. Mere rejection of consideration of an application under PPIRP for the lapse of time prescribed under Section 54D IBC[xx] is a problematic concern while there are no other concerns prima facie.

Further, the very purpose for which PPIRP was enacted was to resolve disputes in a quicker, more reasonable, and an efficient manner. With restraints like these, the entire purpose for which PPIRP came into existence gets hampered. The entire objective of bringing PPIRP into play was to provide a different approach to helping small firms get back on their feet. In contrast to the standard rules for larger businesses, this keeps the current management in place.[xxi] This feature of PPIRP makes the process even more efficient. Given that MSMEs have unique characteristics and informal business ties, the goal is to guarantee that the program does not cause any disruption in the organization’s operations. Maintaining the business as a continuing concern and shielding it from any kind of interruption that would increase the possibility of job losses are in everyone’s best interests. Thus, it is important to remember the heart and soul of an amendment to understand its applicability. A mere time lapse on the part of the parties must not be a reason for complete denial to embrace this process.

Further, one of the observations by the court in the order was that Section 54D (3) of the Insolvency & Bankruptcy Code, 2016[xxii] states that if a Resolution Plan is not approved by the Court of Chancery, the Resolution Professional (RP) must apply for PPIRP termination. In this case, however, the Resolution Professional has filed an application to extend the time. This is in contrast to the section that specifies 120 days from the date PPIRP began. This further highlights the willingness on the part of Resolution Professional to facilitate an easier PPIRP process.

Another unanswered facet of the order was the argument of the counsel that relied on Section 12 of the Act.[xxiii] In PPIRP proceedings, Section 12 of the IBC, 2016[xxiv] ought to be implemented. Section 54P[xxv] outlines the sections that will apply to Chapter III-A, which governs PPIRP mutatis mutandis. This argument was rejected without providing any reasonable rationale for the reason for rejection. Hence, all these facets are problematic and need to be addressed.

Future Trajectory & Conclusion

Taking into consideration, the above aspects, it is necessary that there is an amendment in the Section 54D of the IBC.[xxvi] A prearranged strategy for resolving insolvency between a financially troubled corporation and its creditors is known as PPIRP. Through this method, the contents of the resolution plan can be worked out and agreed upon by the debtors and creditors before the formal start of the insolvency process under the Insolvency and Bankruptcy Code (IBC). Hence, it must be a voluntary process giving parties entire autonomy to go ahead with the planned resolution. Time restraints are necessary but the court must also play a vital role in analyzing the need for providing an extension to the parties based on the facts and circumstances that are subjective to every case. Hence, through this research article, an amendment is sought in the section to provide for time extension in reasonable circumstances.

Author: Nidhi Kamath, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

[i] Understanding the IBC: KEY JURISPRUDENCE AND PRACTICAL CONSIDERATIONS, Insolvency and Bankruptcy Board of India, https://ibbi.gov.in/uploads/whatsnew/e42fddce80e99d28b683a7e21c81110e.pdf (last visited Jul 6, 2024).

[ii] The Insolvency and Bankruptcy Code (Amendment) Act, 2021, No. 26, Acts of Parliament, 2021 (India).

[iii] Pre-packaged insolvency resolution process, Insolvency and Bankruptcy Board of India, https://www.ibbi.gov.in/uploads/whatsnew/a650764a464bc60fe330bce464d5607d.pdf (last visited Jul 6, 2024).

[iv] The Insolvency and Bankruptcy Code, 2016, § 54D, Act No. 31 of 2016.

[v] Supra Note 3.

[vi] The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2018: Bill Summary, PSR India, https://prsindia.org/billtrack/prs-products/prs-bill-summary-3061 (last visited Jul 6, 2024).

[vii] Order under Section 60(5) of IBC, 2016 In the Matter of Vikash Gautamchand Jain RP of Kethos Tiles Pvt. Ltd, NCLT (2024), https://nclt.gov.in/gen_pdf.php?filepath=/Efile_Document/ncltdoc/casedoc/0710102153662020/04/Order-Challenge/04_order-Challange_004_17127517991402920018661684b79bdfe.pdf (last visited Jul 6, 2024).

[viii] Supra Note 4.

[ix] Shree Rajasthan Syntex Ltd. v. SBI, 2023 SCC OnLine NCLT 14673

[x] Supra Note 4.

[xi] Supra Note 9.

[xii] Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta and Ors. (15.11.2019 – SC): MANU/SC/1577/2019

[xiii] The National Company Law Tribunal: PNB v. Jai Laxmi Sugar Products, NCLT (2023), https://nclt.gov.in/gen_pdf.php?filepath=/Efile_Document/ncltdoc/casedoc/2709138032752023/04/Order-Challenge/04_order-Challange_004_1700643539857605863655dc2d304753.pdf (last visited Jul 6, 2024).

[xiv] Kolkata Municipal Corporation v. Union of India, 2021 SCC OnLine Cal 145

[xv] The Insolvency and Bankruptcy Code, 2016, § 18(f)(vi), Act No. 31 of 2016.

[xvi] The Insolvency and Bankruptcy Code, 2016, § 60, Act No. 31 of 2016.

[xvii] Insolvency & Bankruptcy Board of India v. SBI, 2022 SCC OnLine Del 4200

[xviii] Supra Note 14.

[xix] The Insolvency and Bankruptcy Code, 2016, § 60(5), Act No. 31 of 2016.

[xx] Supra Note 4.

[xxi] Supra Note 3.

[xxii] The Insolvency and Bankruptcy Code, 2016, § 54D (3), Act No. 31 of 2016.

[xxiii] The Insolvency and Bankruptcy Code, 2016, § 12, Act No. 31 of 2016.

[xxiv] Supra Note 23.

[xxv] The Insolvency and Bankruptcy Code, 2016, § 54P, Act No. 31 of 2016.

[xxvi] Supra Note 4.