GCCL Infra first to take pre-pack insolvency route

GCCL Infra first to take pre-pack insolvency route

GCCL Infrastructure & Projects (GCCL) has become the first to initiate the pre-packaged insolvency resolution process (PIRP), which was subsequently admitted by the Ahmedabad bench of the National Company Law Tribunal.

To deal with the financial and economic distress of small businesses that were significantly impacted due to the covid-19 pandemic, the PIRP was introduced under chapter IIIA of the Insolvency and Bankruptcy Code, 2016 (IBC), earlier this year.

The aim for introducing the mechanism was to provide an alternative resolution process for entities that qualify as a micro, small or medium-sized enterprise (MSME) under sub-section (1) of section 7 of the Micro, Small and Medium Enterprises Development Act, 2006, in a manner that is friendly and effective, with a shorter timeline and an efficient methodology.

The PIRP enables the creditors and owners of a business to agree to sell the business to an interested buyer. The buyer may be a third party or someone related to the business. The PIRP, in contrast to the corporate insolvency resolution process (CIRP), has a hybrid structure that blends both a formal and informal approach to addressing insolvency issues.

It allows creditors, promoters and other shareholders to come together to identify a prospective buyer and negotiate a resolution plan before approaching the National Company Law Tribunal. The CIRP, on the other hand, more frequently results in the sale or liquidation of the troubled business. The resolution professional appointed by the court takes charge of the business and then draws up and implements a plan of resolution.

PIRPs, under the new provisions, are required to be completed within 120 days from the pre-packaged insolvency commencement date, out of which 90 days are allotted for the resolution professional to file a resolution plan with the adjudicating authority.

On admission of the PIRP, the adjudicating authority shall declare a moratorium under section 14 of the IBC. The period of moratorium shall be effective from the date of order of moratorium until the date where the pre-packaged insolvency resolution process period comes to an end.

A PIRP allows the assets of distressed businesses to be quickly re-allocated into the economy, rather than being subjected to prolonged litigation. While the primary purpose of the IBC itself is to revive highly distressed businesses, a PIRP acts more like an alternative dispute resolution process, as the role of the resolution profession in a PIRP is akin to that of an ombudsman or a monitoring authority, and the promoters, along with the creditors, make necessary decisions regarding the framing and implementation of the process.

The pre-packs are better suited for small businesses, since the creditors and business owners along with interested buyers, having retained their power to manage the affairs of the corporate debtor (contrary to the CIRP), are able to make better crucial business decisions than resolution professionals in courts.

While the fate of this new process is yet to be witnessed in practice, this possibility of an out-of-court arrangement with interested buyers is likely to smoothen the process for MSMEs, which contribute to 45% of overall exports from India. Being the backbone of the national economic structure, it was important that necessary steps be taken for the Indian MSME sector, which had been hit badly by the pandemic. The PIRP is a welcome step and definitely an aid for the revival of the economy.

The dispute digest is compiled by Numen Law Offices, a multidisciplinary law firm based in New Delhi & Mumbai.

The authors can be contacted at support@numenlaw.com.

Readers should not act on the basis of this information without seeking professional legal advice.