IMPACT OF PIRP
Though there are apprehensions regarding the success of Pre-Packaged IBC schemes in an already nascent and developing Indian IBC law, it still has many benefits that are very hard to ignore:
In most cases, it would provide a better return to the Creditors. It is often seen that during a CIRP under the IBC, the value of the assets of the company erodes which ultimately leads to lesser pay to the Creditors from the proceeds of the Resolution Plan. In a PIRP, the value would be determined beforehand which would yield better returns to the Creditors.
It would definitely lead to saving of time, money and resources that are spent for months on legal battles in the National Company Law Tribunal (“NCLT”) as the entire PIRP will end in 120 days and no extension can be given. Not to mention, the Professional Fee involved of various professionals hired to carry out the entire process also takes a toll on the CoC who then sometimes try to bail out of it with whatever return they could get.
There is a surety of the outcome since the Resolution Plan has been discussed and finalized beforehand and the Resolution Professional appointed has to only ensure that everything being done is procedurally and legally tenable. This gives a lot of confidence to the Creditors since they are assured of their money and this helps put more faith in the PIRP.
It would also reduce the burden on the NCLTs. Most Resolutions Plans presented before the NCLT have different stakeholders filing different sorts of Applications to delay or suspend the process. This creates a mess in the proceedings and often leads to prolonging the proceedings to the extent where every stakeholder incurs a loss. To avoid that, a PIRP would help reducing the workload and provide a more efficient resolution.
CHALLENGES
The biggest issue that PIRP will face initially is that while the options are being evaluated by the CD, they would not have Capital Lenders lending money to them. This is because there is obviously a risk involved in the recovery of the money and while lenders already know that the company is stressed, they would not want to take the financial risk. If the company doesn’t have enough cushions to go on for weeks/months while the PIRP is put in place, the idea may fail altogether.
Another major concern that may arise during the PIRP implementation is that it would not have the shield of Moratorium like it is there when a case is admitted under Section 7 or 9 of the IBC. The Moratorium period begins with the commencement of the PIRP. Therefore, the Creditors may enforce their rights and remedies while the CD is negotiating for a PIRP; One major criticism of PIRP is that it is more in the favour of Secured Creditors and neither do the Operational Creditors have much say in the negotiation nor they are given a fair share. This challenge has to be overcome for successful implementation of PIRP in India.
Transparency would also be big hurdle since the existing management would be in-charge of alienating the assets to keep the company afloat and therefore, there would always be apprehensions regarding the correctness of the entire PIRP.
It is even argued that since the company is pushed into insolvency by its own management (be it operational mismanagement or bad business decisions), it is not sensible to allow the same management to alienate the assets of the company and this insolvency framework could turn out to be prejudicial to certain stakeholders.
It is also being contended against the introduction of the PIRP is that it is too soon to bring such a drastic change as the Insolvency law in India is still in its nascent change. There are also apprehensions that it may contribute to burdening the NCLT even more as the PIRP can be challenged at any stage and there would be a big scope of increasing litigation. Additionally, the outgoing management may not be very cooperative with the incoming management and this also may create disputes.
AMLEGALS REMARKS
With the current Pandemic creating havoc in almost every industry, it is certain that a number of companies are pushed into insolvency in the recent times.
Earlier the Government had taken several measures to lessen the distress caused by the pandemic that included increasing the minimum amount of default for initiation of CIRP to Rs. 1 Crores and suspending filing of Applications for initiation of CIRP in respect of the defaults arising during the period of one year beginning from 25.03.2020.
In such times, this Ordinance introducing PIRP would really act as a blessing in disguise as the PIRP would act as a catalyst in helping those companies survive. However, the system comes with its own set of challenges and disadvantages which cannot be shrugged off.
The Indian system is very different from the USA and the UK and a comprehensive study should be conducted in order to ensure that the problems are eliminated, and a better mechanism is put in place. Therefore, it is important to strike a balance between the existing and the new system. Some people do believe in the old school idea of increasing the number of benches of NCLT and sticking to the already existing provisions rather than bringing in new provisions.
There are some reservations against the PIRP based on the fact that bidders close to the Promoters or who can see the company through the eyes of the Promoters will have an advantage over the others.
If the PIRP is implemented well, it would lead to smoother implementation of Resolution Plans, would promote growth and keep the company as a going concern while retaining jobs and ensuring Creditors receive the funds due to them. Especially during these difficult financial times, it is imperative that such a system would only yield fruitful results and would have more pros than cons.
The PIRP will also flush out the uncertainty revolving around whether the stressed assets will draw adequate interest from bidders and in cases where they do so, whether lenders will accept such bids.
For any query or feedback, feel free to connect with rohit.lalwani@amlegals.com or alternatively call on 91-8448548549.
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