Evaluation of Resolution Plans under Pre-packs

Pre-packaged Insolvency Resolution Process (PIRP) is a hybrid combination of informal and formal manner of Resolving Insolvency and is quite popular globally while it is being implemented for the first time in India. Pre-packs have been brought under Indian Insolvency regime to resolve the financial stress in the MSME sector prevailing in Indian economy. Applicability of pre-packs only for MSME can be attributed may be to the reason that it would test the waters on how Indian markets would react to this unique way of resolving stress and thereafter same could be implemented for insolvency Resolution of large corporates. Pre-packs ensures resolution of Insolvency in a least disruptive and cost effective manner. Immediate Resolution of stress in MSME sector by way of pre-packaged Insolvency Resolution Process was required because of a.) large number of employments generated by MSME sector b.) Domino effect of default by a MSME unit in the entire supply chain c.) Unique and simple nature of corporate structure of MSME

Pre-packs comes with traditional concepts of Right of first Refusal and Swiss Challenge method, however in their modified form in order to Resolve the Insolvency of a MSME by first allowing promoter to submit a resolution plan for revival of a stressed company . Pre-packs provides an opportunity to the debtor to submit their Resolution Plan (Base Resolution Plan), however only if their Resolution Plan is not found to be viable, Resolution Plan from market are invited to compete with Base Resolution Plans. Section 54K provides that RP is required to invite Resolution Plans within 21 days if –

1. CoC does not approve Base Resolution Plan:
2. Base Resolution Plan impairs the dues of operational creditor;
3. Base Resolution Plan is not in compliance with Section 30(2) of IBC’ 2016

Evaluation of Resolution Plans under CIRP vs. Evaluation of Resolution Plans under PIRP

Process of Evaluation of Resolution Plans is somewhat different under PIRP than what is envisaged under CIRP. The difference in approach is for the reason that the intent of inviting Resolution Plans under PIRP is to compete with Base Resolution Plans while that is not being the case in case of CIRP.

Under CIRP, Resolution Plans are to be strictly evaluated using Evaluation Matrix. Regulation 39 of CIRP Regulations’ 2016 speaks as under:

“Regulation 39 – Approval of Resolution Plan

The committee shall- (a) evaluate the resolution plans received under sub-regulation (2) as per evaluation matrix;”

Evaluation matrix which is to be used for evaluation of Resolution Plan has been defined under Regulation 2(ha) of CIRP Regulations as under –

“evaluation matrix” means such parameters to be applied and the manner of applying such parameters, as approved by the committee, for consideration of resolution plans for its approval”

There is a different process altogether under PIRP when it comes to evaluation of Resolution Plans. Regulation 47 of PIRP Regulations speaks of evaluation of Resolution Plans.

“47. Evaluation of resolution plans.

(1) The resolution plans received under regulation 46, which comply with the requirements of the Code and these Regulations, shall be evaluated on the basis for evaluation.

(2) The resolution plan which gets the highest score under sub-regulation (1) shall be selected for competition with the base resolution plan.”

Basis of evaluation has been defined under Regulation 42.

Scoring and improvement of resolution plans.

For the purposes of consideration of resolution plans-

“(i) ―basis for evaluation, includes the parameters to be applied and the manner of applying such parameters, as approved by the committee, for evaluating a resolution plan to assign a score to the plan, and disclosed in the invitation for resolution plans.”

From above, it is clear that there is a difference in the manner of evaluating Resolution Plans under CIRP and PIRP. A broader reading of both the Regulations will lead us to understand difference in approach and objective of evaluation of Resolution Plan under PIRP and CIRP –

1. Under CIRP, Resolution Plans can be evaluated under Relative approach where one Plan can be allocated a score and rest of the Plans can be allocated score applying proportionate method. However, this approach can not be followed under PIRP.
2. Objective of using Evaluation matrix under CIRP is for the purpose of consideration of all the Resolution Plans however as against this, objective of using “basis for evaluation” is to select one Resolution Plan among all the plans for competition with Base Resolution Plan.
3. Under CIRP, all the Resolution Plans evaluated using evaluation matrix, are to be put for voting by CoC whereas, under PIRP, only the Resolution Plans with highest score is to be put for voting by CoC.
4. Basis for evaluation under PIRP may provide for conditional formula where in case a Resolution Plan does not meet any condition provided under basis for evaluation, such Resolution Plan shall not be evaluated.

Process of Evaluation of Resolution Plans under PIRP

Under PIRP, once Resolution Plans are invited, RP is required to evaluate them as per basis of Evaluation approved by CoC and disclosed in Invitation for Resolution Plans (“IFRP”). IBBI has provided various illustration regarding what could be various basis of evaluation of Resolution Plans. Based on indicative illustration, some examples of basis for evaluation of Resolution Plans could be as under –

Example 1

X = Upfront cash recovery

Y = NPV of total amount proposed

Z = Term of Resolution Plan

Committee may approve following formula for assigning the score –

2X+4Y

Example-2

X = Upfront cash recovery

Y = NPV of total amount proposed

Z = Term of Resolution Plan

Committee may approve following formula for assigning the score –

2X+4Y subject to the condition that Z is less than 12 months.

So, in case term of Resolution Plan is 18 months then such Resolution Plan will not be evaluated.

Process of evaluation of Resolution Plans under PIRP is as under –

• All the compliant Resolution Plans are to be evaluated as per “Basis of evaluation” mentioned in IFRP.
• Resolution Plan getting highest score shall be selected for competition with Base Resolution Plan.
• In case, Resolution Plan having highest score is “significantly better” than BRP, then same shall be considered by CoC for approval.
• In case, Resolution Plan having highest score is not “significantly better” than BRP, then RP shall disclose the score of all the compliant Resolution Plans and BRP to submitters of these Resolution Plans. All the submitters of Resolution Plans shall improve their Plan as per Regulation 48(4).
• Thereafter Resolution Plan having highest score shall be considered by CoC for approval.

Conclusion

Pre-packs is altogether a new concept in Indian Insolvency regime. We will only have to wait and see how effective pre-packs turns out to be as it will have to undergo lot of challenges before various legal issues that would be faced while its implementation, will be settled, like what we have witnessed in the case of CIRP.