Pre-Package To Rescue Micro, Small And Medium Enterprises: A Step Towards Attaining The SDG 8 Objective?

[By Yasha Goyal and Shreya Ahuja]

The authors are students at the Institute of Law, Nirma University.

Introduction

The Sustainable Development Goal 8 (“the SDG 8”)  “is to promote sustained, inclusive, and sustainable economic growth, full and productive environment, and decent work for all”.[i] The target is to achieve these goals by 2030.[ii] The Covid-19 pandemic that hit the world in 2020 has not only affected healthcare but the economy all over the world has collapsed. The businesses are striving to survive and the failure of business results in the unemployment of a large number of people. The poverty and the income disparity between and within the nations are escalating. Income inequality is soaring and the pandemic has turned into a golden opportunity for the ultra-rich to make fortune. The wealth of billionaires in India increased by 35% during the lockdown and by 90% since 2009.[iii] Whereas, the Micro, Small & Medium Enterprises (“MSMEs”) who play a crucial in the economic growth of the country are hard hit by the pandemic, since 2020 more than 75% of SMEs are incurring revenue losses equivalent to or more than 50%, struggling to continue with their operations.[iv] These reports depict that the target of SDG 8 has become even more distant with the advent of this pandemic. Remarked as the ‘Inequality virus’ by Oxfam International[v], this pandemic calls for action from the government to make laws and policies to protect the people to get grips with the declining economic conditions.

There is legislation in place for businesses going in distress like the Insolvency & Bankruptcy Code, 2016 (“ the IBC”). Although, the impact of the pandemic requires reform especially to support the small business.

Need of IBC to achieve SDG8

The centre of the SDG 8 is the economic growth that results in the employment of all. To attain the targets of SDG 8 the government of India has formulated policies like Skill India, Mahatma Gandhi National Rural Employment Guarantee Act (“MGNREGA”), Make in India, Start-up India.[vi] To attain economic growth it is of paramount importance that the business of the country prospers. Every business in its lifetime passes through a stage of distress, hence it is important to have a policy in place that rescues the business in distress. If the business winds up it is detrimental to the employees working for it, other businesses connected to it, and the overall economy of the country. Since a prospering business contributes towards Gross Domestic Products, increase in exports and the overall economic growth by running constantly. It is imperative to safeguard MSMEs drowning into winding up. It is in this respect,  the IBC was formulated to rescue the Corporate Debtors (“CD”) in distress and protect the business. Considering the current pandemic wherein the businesses are struggling to survive and are on the verge of winding up the pre-packs emerge as a fruitful process to achieve the SDG8 goals. As these MSMEs are turning into CDs with the loss in revenue hence it is imperative to provide corporate rescue since they employ 120 million[vii] people contributing a share of 30% towards the GDP[viii].

Introduction of pre-packs under the Indian Insolvency regime

Pre-pack is a mechanism globally accepted and implemented. Paving a way for resolution of distressed debts by providing a framework of settlement between CD and stakeholders with a formal abdication of law as per the IBC. The prevalent mechanism to constitute a pre-pack is a negotiation between the debtor and buyer before entering in the appointment of a Resolution Professional, who further assists in the passing of a resolution plan. Unlike other nations pre-pack in India is not only about the out-of-court arrangement but is powered by the laws under the IBC till the extent of the existing NCLT supervised resolution process.[ix] However, under CIRP it was a credit in control model with RP in possession. Under pre-packs to retain flexibility with the MSME, the debtor in possession model is allowed. Wherein, the debtor shall remain in possession of the enterprise and continue to run it until the resolution takes place instead of handling the operation to RP as soon as the admission of insolvency proceedings under CIRP.

The option under PIRP provides its inclusive set of laws under section 54C-P of the Code providing a basic structure of the IBC and checks against any forthcoming abuse. The mechanism provides the creditor also an option to choose to proceed by way of CIRP. Further, 66% of approval by creditors is necessary for the resolution process.[x] The duration of the entire proceeding has to be done within a period of 90 + 30 days from the initiation as opposed to the CIRP process granting 330 days from initiation. [xi]

The advantage of pre-packs over the existing formal regime of insolvency is that the pre-packs would cause the minimum disruption to the business of the debtor as the CD continues with the existing management unlike in the CRIP proceedings where the management is shifted to the Resolution professional. Further, this is time and cost-efficient as the pre-pack enables the faster resolution that is within 120 days as prescribed in the Ordinance and non-requirement of IP to manage affairs save the cost inclusive of a fee. Moreover, this alternative has the potential to reduce the burden on the courts and tribunals.

The advantages of the pre-pack arrangement that rescues the business would help to attain SDG 8 that is stable economic growth and retain the employment of the people.

Relevance of Pre Packs

The insolvency regime is indeed evolving with multiple amendments coming its way until 2021. The BLRC believes pre-pack is the next step for India towards its natural evolution and need of the hour amongst the pandemic. The creditors were provided rescue under the Insolvency framework of the IBC. However, under the current formal regime of CIRP, the RA is required to rescue a failing company through a resolution plan. In a time when every company is reeling from stress, the possibility of finding rescue through a resolution plan is minimal. If the companies undergo insolvency proceedings during these times there is a high possibility of ending up in liquidation since third-party buyers might resist investing in a distressed asset with the uncertainty and risk hovering around. This premature death of a company would not resolve stress nor maximize the value and it goes against the objectives of the IBC.[xii]

Further, the possible aftermath of COVID-19 according to the IMF and World Bank is the rise in the number of insolvencies with the economy facing the fate of the great depression.[xiii] In this aspect, the Government of India provided a blanket suspension of insolvency proceedings and without any alternative mechanism to cover for the distress, it can lead to depletion of asset value and a huge loss to stakeholders, opposing the objectives of IBC.[xiv] Therefore, a pre-pack was introduced in India to render a hybrid of a court-supervised arrangement and out-of-court workout.[xv] It is pertinent to note that such arrangement is only applicable to the MSMEs. This further raises the issue of discrimination among other CDs and MSMEs leading to violation of Article 14 since there exists no ‘intelligible differentia’ and ‘reasonable classification’ to uphold this distinction.[xvi] However, it is necessary to note that the MSMEs are the backbone for the growth of India. The Share of MSME Gross Value Added (GVA) in total GVA during 2016-17 was 31.8% and the Share of MSME related Products in total Export from India during 2018-19 is 48.10%[xvii]. It also provides for significant employment in the country. However, this is the sector that is worst affected by the Pandemic. The companies are classified under MSME based on the annual turnover. The stranded migrants, lockdowns and the uncertain future depicts that these enterprises are the worst affected. Therefore to save jobs, it is important to rescue these enterprises. Hence, the distinction created between MSMEs and other CDs is reasonable and based on intelligible differentia. Also, the aim of the pre-package is not limited to MSMEs rather they shall apply to other CDs although, in a phased-wise implementation. IBC being economic legislation works on the ‘hit & trialapproach and the ‘one size fits all approach cannot be adopted under economic legislation. Therefore, presently, the ordinance is chalked out for MSMEs pertinently carrying the burden of the economy. Also, after the revocation of suspension limits of 1Cr. to 1 lakh, it becomes necessary to introduce pre-packs for MSMEs since they will be forced into liquidation if CIRP is initiated against them.

Conclusion

SDGs were inculcated in the UN nations to provide a guide to make the world a better place for now and for coming generations. SDG 8 in particular aims to ensure sustained economic growth and decent work for all and pre-pack is one of the measures in line with SDG 8. The Pre-pack is a faster and effective mechanism to rescue corporate debtors, since it is a hybrid of formal and informal mechanisms there is minimal disruption to the operations of the entities, ensuring jobs and growth at the other end. By supporting the pre-packaged scheme, India is taking a new step towards its evolution in the IBC by preventing CDs from winding up. The companies must be saved from the long and tedious court procedures especially during the COVID-19 situation. Such initiatives also reflect the fast pace of India in achieving the targets of SDG 8.

Therefore, the pre-packs are a welcome move for India in terms of preserving and revitalizing the growth of economic sectors, abstaining workforce fall in the arms of poverty.

 

[i] U N High Level Political Forum, Voluntary National Review Report on Implementation of Sustainable Development Goals, (July 2017).

[ii] UN in India, SDG 8: Decent Work And Economic Growth, https://in.one.un.org/page/sustainabledevelopment-goals/sdg-8/.

[iii] The Inequality Virus: Global Report 2021, Oxfam India (22 Jan, 2021), https://www.oxfamindia.org/knowledgehub/workingpaper/inequality-virus-global-report-2021.

[iv] MSME Day 2020: the COVID -19 pandemic and its impact on small business, International Labour Organisation ( 26 June 2020) https://www.ilo.org/empent/whatsnew/WCMS_749275/lang–en/index.htm.

[v] Supra note, iii.

[vi] Supra note, i.

[vii] Micro, Medium & Small Scale Industry, CII ( April, 10, 2021, 3:54 PM),  https://www.cii.in/Sectors.aspx?enc=prvePUj2bdMtgTmvPwvisYH+5EnGjyGXO9hLECvTuNuXK6QP3tp4gPGuPr/xpT2f#:~:text=Micro%2C%20Medium%20%26%20Small%20Scale%20Industry&text=They%20have%20been%20able%20to,growth%20rate%20of%20over%2010%25.

[viii] Centre aims to increase MSMEs’ share in GDP to 40%: Nitin Gadkari, Business today, ( April, 1, 2021, 5:55 PM), https://www.businesstoday.in/current/economy-politics/centre-aims-to-increase-msme-share-in-gdp-to-40-nitin-gadkari/story/430526.html.

[ix] Ministry of Corporate Affairs, Report of the Sub-Committee of the Insolvency Law Committee on Pre-packaged Insolvency Resolution Process (2020), https://www.ibbi.gov.in/uploads/whatsnew/34f5c5b6fb00a97dc4ab752a798d9ce3.pdf.

[x] Insolvency and Bankruptcy Code, IBC, S. 54A(3) (2021).

[xi] Insolvency and Bankruptcy Code, IBC, S. 54D(1) (2021).

[xii] Report of the Sub-Committee of the Insolvency Law Committee on Pre-packaged Insolvency Resolution Process 2021 https://ibbi.gov.in/webfront/notice_alongwith_subcommittee_report_for_public_comments.pdf

[xiii] Yan Liu, José Garrido, and Chanda DeLong,  Private Debt Resolution Measures in the Wake of the Pandemic, IMF Special Series on COVID-19 (2020)file:///C:/Users/happy/Downloads/en-special-series-on-covid-19-private-debt-resolution-measures-in-the-wake-of-the-pandemic.pdf

[xiv] Aparna Ravi, Introducing Pre-packs in India: A useful tool during the times of Covid-19? Oxford business Law Blog (April 14, 2021, 4:45 pm),

https://www.law.ox.ac.uk/business-law-blog/blog/2020/05/introducing-pre-packs-india-useful-tool-times-covid-19

[xv] Supra note, x.

[xvi] Ds Nakara v. Union of India, AIR 1983 SC 130.

[xvii] Directorate General of Commercial Intelligence and Statistics (DGCIS) http://www.dgciskol.gov.in/ (last visited 14 April 2021)

Comments

Leave a Reply

Your email address will not be published. Required fields are marked *

Contact Us

Kerwa Dam Road., 
National Law Institute University, Bhopal
Madhya Pradesh, India. 462044​.

write to us at – cbcl@nliu.ac.in