Efficacy of Prepacks in the era of Section 29A of the Code

Contributed by Hammurabi & Solomon Partners




The introduction of prepacks for MSME’s vide ordinance dated 04.04.2021 by insertion of a separate chapter, Chapter IIIA in the Insolvency & Bankruptcy Code (Code), has given a ray of hope for speedy revival of the MSME’s.


Subsequently, there’s a surge in demand for similar inclusion of prepacks as an alternative to the Corporate Insolvency Resolution Process (CIRP) of non-MSME Corporate Debtors as well.


“Prepacks” denotes prepackaged plans (recommended as a viable alternative to the conventional CIRP in India by the Banking Law Reforms Committee) whereby a corporate debtor, or a financial creditor may trigger the process by independently appointing an Insolvency Professional.


The Insolvency Professional so appointed shall thereafter invite plans from Resolution Applicants and ensure that the Resolution Plan offered is the best possible Plan in the particular scenario. Upon submission of the Plans received from Resolution Applicants, the independently appointed Insolvency Professional shall present the same to the Committee of Creditors for approval of any of the Plans which serves the best interests of all.


Thereafter, the Insolvency Professional shall file the Resolution Plan approved by the Committee of Creditors, along with other relevant documentation evidencing the procedural steps undertaken, with the Adjudicating Authority, i.e., the National Company Law Tribunal. This should be followed by a public announcement disclosing the details of the pre-packaged insolvency resolution process and the proposed Plan, in order to provide an opportunity to any affected stakeholder to object to the proposed pre-packaged plan.


Upon receiving any objections that may be received after the public announcement and redressing the same, the Adjudicating Authority shall approve the plan. which could be adopted by the Financial Creditors in order to provide for a speedy insolvency resolution with most part of the steps outside of the NCLT and only the final plan is taken to NCLT for its scrutiny and approval.


These prepacks have various other models also available globally, however, the one most suited for the Indian scenario is the one stated above which is a hybrid model and taken into consideration the concerns of all stakeholders while substantially reducing the burden of the NCLT.


Although the advantages of pre-packs are well known and sufficiently spoken about, the timing for introduction is still debatable.


In the present COVID times when there is a likelihood of surge in the number of CIRP cases, makes it conducive for introduction of prepacks.


This would not only reduce the already burdened NCLT’s but shall also enable preserving the Corporate Debtors being pushed into liquidation in the absence of adequate Resolution Applicants.


The prepacks shall also be able to save the asset value which gets depreciated over years during the pendency of the CIRP process and thus likely to fetch better proceeds for the Resolution Plan. Prepacks are globally acclaimed to be less time consuming than the usual CIRP Process and thus has its own lucrative advantages to urge the Legislature for its introduction at the earliest.


Since prepacks would have the statutory backing, the sanctity of the process never gets compromised and the role of the Resolution Professional as well as the COC becomes critical in such circumstances. The Corporate Debtor also enjoys the moratorium as envisaged in the usual CIRP Process that enables the smooth functioning of the business.


While prepacks has its advantages, the role of the Promoters in the process cannot be undermined since the Promoters have the complete understanding of the business of the company, its assets and its liabilities and therefore excluding them in the process due to the restrictions under Section 29A may prove detrimental to achieving the purpose of prepacks.


It is in this context that the Legislature may consider exempting the provisions of Section 29A (c) to the pre-packs in order to enable the Promoters submit a resolution plan to the Resolution Professional under the prepack regime which can be subsequently placed before the COC for approval, under the supervision of the NCLT, as has been mandated in the normal CIRP process as well.


Additionally, prepacks could also include providing for Scheme of Arrangement under Section 230 of the Companies Act, 2013, as has been done in other jurisdictions, viz, Singapore etc.


However, after the finding of the Hon’ble Supreme Court with respect to applicability of Section 29A of the Code to schemes under Section 230 of the Companies Act, 2013 in ‘Arun Kumar Jagatramka Vs Jindal Steel and Power Limited'[MANU/SC/0182/2021] vide its judgment dated 15.03.2021, there shall arise certain operational hurdles before the Legislature in terms of carving out exceptions to applicability of Section 29A in cases of prepacks through the Section 230 of the Companies Act route. In the abovesaid judgement the Hon’ble Supreme Court held that “a person who is ineligible under Section 29A of the Insolvency and Bankruptcy Code, 2016 to submit a resolution plan is also barred from proposing a scheme of compromise and arrangement under the provisions of Section 230 of the Companies Act, 2013.”


The two judge bench also upheld the constitutional validity of Regulation 2B of IBBI (Liquidation Process) Regulations, 2016 which stipulate that a person who is not eligible under the Code to submit a Resolution Plan for Insolvency Resolution of the Corporate Debtor shall not be party in any manner to such compromise or arrangement.


The Hon’ble Supreme Court while dealing with the issue ‘Whether a promoter is eligible to file an application for Compromise and Arrangement under Section 230 to 232 of the Act, 2013 while he is ineligible under Section 29A of the Code to submit a ‘Resolution Plan’ analyzed the provisions of Section 29A, Section 35(1) (f) of the Code and Section 230 of the Companies Act, 2013.


Section 29A had been inserted with a retrospective effect vide Insolvency and Bankruptcy Code (Amendment) Act, 2018. Section 29A stipulates the category of persons who shall not be eligible to submit a resolution plan.


Section 29A (c ) provides for “Persons not eligible to be resolution applicant. –

“A person shall not be eligible to submit a resolution plan, if such person, or any other

person acting jointly or in concert with such person—

  1. is an undischarged insolvent;

  2. is a wilful defaulter in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949 (10 of 1949)”


Section 29A (g) disqualifies a person from being a resolution applicant ‘if they have a promoter or in the management or control of a Corporate Debtor in which a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place and in respect of which an order has been made by the Adjudicating Authority under the Code’. Section 29A is a part of the resolution mechanism, the object and purpose of Section 29A is to prevent back door entry to the promoter which should not be allowed to have an advantage of its own wrong.


Section 35(1) (f) extends the ineligibility where the liquidator is conducting a sale of the assets of the corporate debtor in liquidation.


Section 230 of the Act, 2013 is incorporated under Chapter XV which is titled as “compromise, arrangement and amalgamations”.


The said section is wider in its ambit in the sense that it is not confined only to a company undergoing liquidation process or to the Corporate Debtor which is being wound up under Chapter III of the Code. Therefore, the rigors of the Code will not apply to the proceedings under Section 230 of the Act, 2013 where the scheme of compromise or arrangement proposed is in relation to an entity which is not subject of a proceeding of the Code.


Having said that, where a compromise or arrangement under Section 230 of the Act, 2013 is proposed in respect of a company which is undergoing liquidation under the Code, then it becomes necessary to read both sets of provisions in harmony.


Harmonious construction between the two statutes would ensure that while on the one hand a scheme of compromise or arrangement under Section 230 is being pursued, this takes place in a manner which is consistent with the underlying principles of the Code because the scheme is proposed in respect of an entity which is undergoing liquidation under Chapter III of the Code. As such, the company has to be protected from its management and a corporate death.


In the case of a company which is undergoing liquidation pursuant to the provisions of Chapter III of the Code, a scheme of compromise or arrangement proposed under Section 230 of the Act, 2013 is a facet of the liquidation process. The object of the scheme of compromise or arrangement is to revive the company. Liquidation of the company under the Code is a matter of last resort.


The Hon’ble Supreme Court while dealing with the issue whether provisions of Section 29A read with Section 35(1)(f) of the Code would be applicable on the scheme of compromise and arrangement under the Section 230 of the Act, 2013 observed that

“…….in the context of the statutory linkage provided by the provisions of Section 230 of the Act, 2013 with Chapter III of the Code, where a scheme is proposed of a company undergoing liquidation, it would be far-fetched to hold that the ineligibilities which attach under Section 35(1) (f) read with Section 29A would not apply when Section 230 is sought to be invoked. Such an interpretation would result in defeating the provisions of the Code and must be eschewed”.

The Hon’ble Supreme Court on challenge to Regulation 2B of the Liquidation Process Regulations observed that even in the absence of the Regulation 2B, a person ineligible under Section 29A read with Section 35(1) (f) of the Code is not permitted to propose a scheme for revival under Section 230 in case of a company which is undergoing a liquidation process under the Code.


The proviso to Regulation 2B is clarificatory in nature. Even, in the absence of the proviso, a person who is ineligible under Section 29A would not be permitted to propose a compromise or arrangement under Section 230 of the Act, 2013. Primarily, the Code is a legislation aimed at re-organization and resolution of insolvencies wherein Liquidation is a matter of last resort.


These objectives can only be achieved only through a purposive interpretation which requires courts while infusing meaning and content to its provisions to ensure that the problems which beset the earlier regime do not enter through the backdoor through disingenuous stratagems.


While in the present legislative framework, to allow a person who is ineligible under the provisions of Section 29A from submitting a compromise and arrangement scheme under Section 230 of the Act, 2013 at the liquidation stage is contrary to the letter and spirit of the Code, however in cases of prepacks the purposive interpretation of the Code shall be required to be carried out and the suitable exceptions may be carved through proper check and balances in place with the appointment of Resolution Professional and constitution of COC in a similar manner as in the normal CIRP Process, but the Promoters must also be given an opportunity to come up with Resolution Plans including through the Scheme of Arrangements as envisaged under Section 230 of the Companies Act in order to ensure a speedier revival of the Corporate Debtor while maximizing the asset value and thus creating a win win for all the concerned stakeholders.


Contributed by Hammurabi & Solomon Partners


The above article has been authored by Ms. Shweta Bharti( Senior Partner) and Ms. Shuchi Shejwar(Principal Associate).