Comparative Study of ‘Debtor in Possession Model’ under the Pre- packaged Insolvency
Devyanshi Gupta
4th Year Student, BML Munjal University
Abstract
The research paper aims to comprehensively analyse the Debtor in Possession Model under the Pre-Packaged Insolvency Process. The paper would discuss the Debtor in Possession Model in India and would identify the shortcomings of the model. It would also discuss the debtor in possession model in the UK (United Kingdom) and would analyse the aspects which could be incorporated within the Indian framework. The paper can be considered as a comparative study of the debtor in possession model under the Pre-Packaged Insolvency between the two jurisdictions to highlight the shortcomings of the Indian model and focus on aspects which could be incorporated in the Indian Pre- Packaged Insolvency regime. To prepare the research paper, I would refer to several resources including journal articles/review papers, blogs, etc. to gather a comprehensive understanding about the research topic. The selected articles, blogs, etc. are written by different authors which provide relevant insights which would help in answering the research question. Further, I would also use some case laws, which would support my views/points in the research paper.
Introduction
Pre-Packaged Insolvency Process was major step taken in April 2021 for the benefit of medium and small-scale enterprises (MSMEs) in India. The introduction of the pre-packaged insolvency regime was a significant step towards providing greater protection and rehabilitation of MSMEs, after they were severely affected because of the COVID – 19 pandemic. The insolvency process has been adopted by many countries to ensure a systematic insolvency procedure for small scale industries. It is a speedier and convenient way of conducting insolvency proceedings for the small and medium scale enterprises. The Pre-Packaged insolvency process majorly focuses on the protection of debtors and ensures that they get wider scope of participation in the insolvency process. The pre-packaged insolvency is based on the concept of ‘debtor in possession model’ is different from the regular framework of ‘creditor in possession model’. While the creditor in possession model involves greater involvement of creditors through formation of committee of creditors, the debtor in possession model makes shift towards protection of debtors. The debtor in possession model is briefly elaborated under the Section 54H(a) of the Insolvency and Bankruptcy Code. The paper seeks to further elaborate on the debtor in possession model and conduct a comparative study to discuss the concept comprehensively.
Pre-Packaged Insolvency Resolution Process
The Chapter III-A of the Insolvency and Bankruptcy Code (IBC) deals with the Pre-Packaged Insolvency Resolution Process (PPIRP). The IBBI (Pre-Packaged Insolvency Resolution Process) Regulations, 2021 lays down the process and manner in which pre-packaged insolvency should be initiated for MSMEs. The pre-packaged insolvency resolution process is voluntarily initiated by the debtors who are distressed and needs to be revived. It involves a pre-negotiation of the terms of the insolvency resolution plan between the creditors and debtors before the formal insolvency proceedings commences. Such pre-negotiation provides greater flexibility and transparency between the parties to take suitable decisions without being bound by formal procedures. This saves time, enables faster insolvency resolution and ensures that interests of all stakeholders are secured. After the resolution plan is finalized, it is further approved by majority of creditors. The plan is thereafter submitted to NCLT for validation. According to the Article by M.P. Ram Mohan & Vishakha Raj[1], the pre-packaged insolvency process often involves sale of part or whole of company’s business, when the pre-negotiated plan is implemented. The pre-negotiated arrangement saves time of debtors and all the stakeholders and prevents huge amount of dilution of company’s assets. It is a more efficient method of insolvency resolution as the costs related to insolvency resolution process gets reduced due to speedy resolution. As provided under the IBBI framework of pre-packaged insolvency, for the larger benefit of MSMEs and small-scale businesses, the trigger (default) amount is reduced to Rs. 10 lakhs, which is the amount of default at which the pre-packaged insolvency can be initiated. The process ensures lesser involvement of courts and Insolvency Professionals and entails smoother and systematic out of court settlement.
Debtor In Possession Model in India
The Report of the Sub-Committee of the Insolvency Law Committee on Pre-packaged Insolvency Resolution Process[2] suggests ‘debtor in model’ as a feasible option for corporate debtors who can preserve and control the management of their businesses even during the initiation of resolution of process. The debtor in possession model was first introduced in USA wherein the debtors were allowed to control and manage their assets. It is contrary to the underlying basic concept of ‘creditor in possession’ under the Indian insolvency regime. In the debtor in possession model, the Board of Directors does not get dissolved, and the management does not gets transferred to the Resolution Professional. Thus, there is an inherent conflict between the basic framework of the Insolvency and Bankruptcy Code and the underlying principles of pre-packaged insolvency. With the introduction of the debtor in possession model in India, there have been several critiques about the model. In the case of Arun Kumar Jagatramka v Jindal Steel and Power Limited[3], the Supreme Court stated that the person who was the cause of the problem or the corporate debtor, against whom the resolution process is initiated cannot himself become part in resolution of the problem. The debtor in possession model provides greater power and encourages huge participation of debtors in the resolution process. In my opinion, this may lead to serious consequences. While, debtors, being an important party to transactions, should be permitted to participate in the resolution process, however, substantial involvement of corporate debtors in the resolution process may not lead to transparency in the formation of resolution plan. This is because the corporate debtors may take unfair advantage and may direct the decision-making process in their favour, this may often lead to substantial violation of stakeholders’ interests due to the predominant power conferred upon them by the debtor in possession approach. Thus, the formation of the resolution plan may get biased and manipulated.
Further, the pre-packaged insolvency resolution process in India involves minimal participation of creditors, therefore, according to the M.P Ram Mohan’s article, the creditors often lack knowledge about the company’s distressed position, until the formal resolution process is initiated.
The Pre-Packaged insolvency resolution process, as a resolution framework has been also criticized in India since it involves minimum participation of adjudicating authority in the pre-packaged insolvency process. It was stated that the insolvency regime in India is a novel concept, and it requires the supervision and substantial involvement of NCLT over the insolvency resolution process. The pre-packaged insolvency process was questioned by the Bankruptcy Law Reform Committee on this ground. In my opinion, to make the insolvency resolution process more flexible and convenient for the stakeholders including the creditors, and for the benefit of debtors, it is important that process is conducted independently among the creditors and debtors, with minimum interference of the adjudicating authorities. This would ensure speedy and efficient insolvency resolution.
Debtor In Possession Model In UK
According to the blogpost by HNLU[4], the insolvency reforms in UK were first introduced in the year 1986 wherein the concept of ‘Corporate Rescue’ emerged. However, the Insolvency Act, 1986 did not explicitly discussed about the pre-packaged insolvency resolution process. Later, Part 10 of the Entreprises Act, 2002 was introduced and the Insolvency Act, 1986 was further revised. The UK follows the debtor in possession model, namely the Company Voluntary Arrangement. The arrangement is more informal and flexible. According to the paper by Chris Umfreville[5], the Company Voluntary (CVA) and the pre-packaged insolvency (PPIRP) are tied by a common factor i.e they ensure that the existing management maintains and controls the business. The State of Insolvency Practice 16(SIP 16)[6] defines pre-packaged sale in administration as an arrangement wherein the negotiation regarding the sale of whole or part of assets or business is done with the purchaser, before the appointment of the administrator who thereafter effects the sale. According to the blogpost by Norton Rose Fulbright[7], during the negotiation between the creditors and debtors, the imposition of moratorium safeguards the debtors from individual creditors who may attempt to initiate separate legal proceedings during the negotiation period to get maximum benefits from the resolution process. During the moratorium period, the directors of the company try to restructure and revive the business back to its original position. Such moratorium period is important as it buys time period for the debtor company to revive and prevent itself from undergoing through the resolution process. In my opinion, the imposition of moratorium period would make the resolution process smoother and would prevent any kind of delay or disruption in the conduct of the insolvency resolution process.
Another important procedure under the rescue procedure in England and Wales is the Administration procedure. The main objective of such procedure is to rescue and rehabilitate a business without disrupting its daily affairs. It is ensured that the sale of assets of the company takes place when it is a going concern.
Like India, UK also believes in the concept of ensuring mutual cooperation of both creditors and debtors to ensure a speedy and efficient pre-packaged insolvency resolution. However, the legal framework and the manner in which the pre-packaged insolvency process are not completely the same. Considering the ‘debtor in possession model’, both the countries aim to ensure sufficient participation of debtors in the pre-packaged insolvency resolution process along with safeguarding the interests of creditors, however there are certain aspects within the UK pre-pack framework which can be incorporated in the Indian pre-pack insolvency framework.
Aspects India can incorporate into its Pre-Packaged Insolvency Resolution Process Framework from the UK’s Pre-Pack Framework
According to a research paper on Pre-Packaged Insolvency in India[8], as a general suggestion, it is advised that the creditors should be encouraged to cooperate and participate in the pre-packaged insolvency resolution process. They should be provided incentives to encourage them to undertake PPIRP and not to opt for CIRP. It is advised to take the consent of the class of creditors and assure them of an efficient pre-pack resolution process. This would make the PPIRP smoother and would lessen the possibility of objections (if any) raised by the creditors.
According to the said research paper, to supervise and review the pre-packaged process, certain pool of professionals are appointed in the UK, who keep a check on the asset sale decisions made by the debtor during the pre-pack process to ensure greater transparency and protection of creditor’s interests. Taking cue from such recommendation by Graham Committee, the Indian pre-packaged insolvency resolution process can incorporate the aspect of check and supervision by professionals into its PPIRP framework. Upholding the concept of ‘debtor in possession model’, certain pool of professionals can be appointed by the Insolvency and Bankruptcy Board of India(IBBI), who would review the conduct of class of creditors/individual creditors during the negotiation on the terms of resolution plan and the pre-pack insolvency process, and during the imposition of period of moratorium, to ensure that they do not take unfair advantage and make the debtors stand in a disadvantaged position during negotiations. Further, the pool of professionals may also regulate the conduct of creditors during the moratorium period and ensure that they do not initiate parallel proceedings against debtors during the PPIRP and impose substantial amount of fine on defaulters in case of non-compliance.
After analysing, several aspects related to debtor in possession model and the PPIRP approach in general, I believe that the power of debtors and the role of creditors in the negotiations and the PPIRP, should be reviewed and supervised to ensure that no party takes an unfair advantage or disrupts the efficiency of the pre-pack insolvency resolution process. Thus, a proper balance should be maintained between the powers of all the parties (including debtors, under the debtor in possession model) who become part of the PPIRP, to ensure that the basic objective the pre-packaged insolvency regime of providing efficient and speedy insolvency resolution is not defied.
Conclusion
To conclude, the pre-packaged insolvency process in India is a novel concept and it is necessary to make consistent improvements in its framework to ensure effective outcomes and to instill trust within stakeholders, along with ensuring proper balance between the powers of debtors and other stakeholders under the debtor in possession model.
References:
[1] M.P. RAM MOHAN & VISHAKHA RAJ, ‘Pre-Packaged Insolvency Regulation: What can India learn from the United Kingdom and the United States?’ (2021) 29 Am. Bankr. Inst. L. Rev. 231 < https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/abilr29§ion=14> Pg 233
[2] Ministry of Corporate Affairs, Report of Sub-Committee of the Insolvency Law Committee on Pre-Packaged Insolvency Resolution Process (2020)
[3] Arun Kumar Jagatramka v Jindal Steel and Power Limited (2021) ibclaw.in 46 SC
[4] HNLU CCLS Blog, ‘The Three Musketeers of Pre-Packaged Insolvency – Transparency, Administration, and Role of the Courts’ (2021) < https://hnluccls.in/2021/07/06/the-three-musketeers-of-pre-packaged-insolvency-transparency-administration-and-role-of-the-courts/>
[5] Chris Umfreville, ‘Pre-Packaged Administrations and Company Voluntary Arrangements: The case for a holistic approach to reform’ <https://research.aston.ac.uk/files/30126910/Pre_Packaged_Administrations_and_Company_Voluntary_Arrangements.pdf >
[6] Insolvency Practitioners Association, Statement of Insolvency Practice 16 v.3, para.1 <https://www.r3.org.uk/media/documents/technical_library/SIPS/SIP%2016%20Version%203%20Nov%202015.pdf>
[7] Norton Rose Fulbright, ‘The UK Corporate Insolvency and Governance Act 2020: A move to a more debtor restructuring regime?’ <https://www.nortonrosefulbright.com/en/knowledge/publications/5ac21a15/the-uk-corporate-insolvency-and-governance-act-2020>
[8] Himani Singh, ‘Pre-Packaged Insolvency in India: Lessons from USA and UK’ <https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID3518287_code3424337.pdf?abstractid=3518287&mirid=1 > Pg 13
