MSME

Pre-packaged Insolvency Resolution Process (PPIRP) for MSMEs

Pre-packaged Insolvency Resolution Process

The Insolvency and Bankruptcy Code, 2016 (IBC) was introduced to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnerships and individuals in a time-bound manner. Initially, the IBC only contained provisions relating to the Corporate Insolvency Resolution Process (CIRP) for Corporate Debtors. By way of the IBC (Amendment) Act, 2021, the concept of the Pre-Packaged Insolvency Resolution Process (PPIRP) was introduced. It is an efficient mechanism for alternative insolvency resolution process. The PPIRP applies to the Micro, Small, and Medium Enterprises (MSMEs) falling under the ambit of the MSME Development Act, 2006 along with the rules and regulations framed thereunder. The point of distinction between CIRP and PPIRP is that when an application for initiation of PPIRP is accepted, the management and control of the business remains with the Corporate Debtor and is monitored by a Resolution Professional.

What is the Pre-packaged Insolvency Resolution Process?

The CIRP can be time-consuming and expensive. PPIRP is a flexible and economical option for resolving insolvency for MSMEs in financial stress. It is a unique or hybrid mechanism that recognizes out-of-court resolution under insolvency law with appropriate safeguards to the interest of all stakeholders. It is also known as a ‘debtor in possession with the creditor in control’ model and is applicable only to MSMEs.

Prerequisites for applying for the initiation of Pre-packaged Insolvency Resolution Process

An application for PPIRP can be made only by those Corporate Debtors who qualify as an MSME under section 7(1) of the MSME Development Act, 2006[1]. For the initiation of Pre-packaged Insolvency Resolution Process, an MSME must approach the Adjudicating Authority. PPIRP can be opted if an MSME has committed a default of at least Rs. 10,00,000/- (Rupees Ten Lakh only). However, if the amount of default exceeds Rs. 1,00,00,000/- (Rupees One Crore Only) then the PPIRP will not apply and the MSME will have to initiate CIRP. In cases where after the initiation of the PPIRP but before the approval of the resolution, the Corporate Debtor meets the threshold of CIRP, then the Pre-packaged Insolvency Resolution Process stands terminated and CIPR has to be initiated. Other criteria that have to be satisfied by an MSME for the initiation of Pre-packaged Insolvency Resolution Process are as follows:

  • The MSME applying for PIRP should not have undergone PPIRP or completed CIRP during the preceding 3 (three) years from the date of initiation of PPIRP;
  • MSME should not be undergoing CIPR at the time of making an application for PPIRP.
  • An MSME should be eligible to be a resolution applicant under Section 29A of IBC.
  • An MSME has not been ordered to be liquidated as per Section 33 of the IBC.
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Before applying for initiation of Pre-packaged Insolvency Resolution Process, the majority of directors or partners of the Corporate Debtor have to file a declaration before the Adjudicating Authority (AA) and a resolution has to be passed by at least 3/4th (three-fourths) of the number of directors or partners of the Corporate Debtor approving the filing of the application for initiation of PPIRP. In addition to this, approval from the financial creditors of the Corporate Debtor representing at least 66% of the financial creditors is required before applying for initiation of PPIRP.

Initiation of the Pre-packaged Insolvency Resolution Process

After the above criteria are satisfied, an application for initiation of PPIRP should be filed before the AA along with the requisite fee. At the time of applying for initiation of PPIRP, the name of the Insolvency Professional (IP) is required to be proposed by the financial creditors of the Corporate Debtor. The IP is required to prepare a report on whether the Corporate Debtor meets the requirements and whether the base resolution plan complies with the provisions of the IBC. The name of the Resolution Professional (RP) should also be provided in the application for initiation of PPIRP. Within 14 (fourteen) days from the date of making an application for PPIRP, the application has to be accepted or rejected by the AA. If the AA rejects the application, it is required to give a 7-day notice to the Corporate Debtor to rectify any error or defect in the application. However, if the application for initiation of PPIRP is accepted by the AA, then the Committee of Creditors (CoC) has to be constituted within 7 (seven) days of the commencement of PPIRP. The management control in a PPIRP is vested with the Corporate Debtor and it is the CoC that is empowered to resolve to vest the management control with the RP thereafter. In case of such a change in the vesting of management control, the CoC has to make an application before the AA.

Consideration and approval of Base Resolution Plan

The Corporate Debtor is required to submit a base resolution plan to the RP within 2 days from the date of the order passed by the AA. Thereafter, the RP is required to submit the base resolution plan to the CoC. It is the CoC that approves submitting the base resolution plan before the AA for its approval. However, before submitting the base resolution plan to the AA, the CoC is required to ensure that the base resolution plan does not impair the claims of the Corporate Debtor towards its operational creditors. This ensures that the operational creditors are fully paid to the number of their confirmed claims. If the operational creditors are not paid in full, then it is the responsibility of the RP to invite new resolution plans. Before inviting a new resolution plan, the CoC will grant an opportunity to the Corporate Debtor to revise the base resolution plan. This is done to ensure that the operational creditors do not suffer undue financial loss. Unlike operational creditors, financial creditors do not have any safeguard to secure interest and may have to suffer hair cut (losses incurred by creditors on the resolution of stressed assets) in respect of their claims. 

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 The new resolution plans must be submitted to the AA with prior approval by a vote of the CoC comprising not less than 66% of the voting shares. If the AA is satisfied with the resolution plan, then it shall pass an order approving the resolution plan within 30 (thirty) days from the date of receipt of such plan. The same shall be binding on all the stakeholders. However, if the AA rejects the application for approval of the resolution plan submitted to it by the CoC, then the PPIRP will stand terminated. If the CoC is not satisfied with the new resolution plans and does not grant its approval even then the RP is required to apply the AA praying for the termination of the entire PPIRP.

Real Estate Developer Companies and Pre-packaged Insolvency Resolution Process

Some real estate developers also fall within the definition of MSMEs if their thresholds match the threshold prescribed for the MSMEs and avail the benefits of PPIRP. However, in the case of PPIRP of real estate development companies, the interest of the home buyers will have to be protected. Further, it is also necessary to ensure that the financial creditors are presenting a plan which aligns with the interest of the home buyers.

Any objections to the application seeking PPIRP before its admission shall be dealt with by the AA. When the application for initiating the PPIRP is accepted, the moratorium period as per section 14 of IBC comes into force. Once the moratorium period has begun, the PPIRP process has to be completed within 120 days and the resolution plan has to be submitted by the RP within 90 days from the date of commencement of the PPIRP.

Advantages of Pre-packaged Insolvency Resolution Process

  • Preliminary work was already conducted before applying to the Adjudicating Authority
    Under this process, the preliminary steps such as i) obtaining approval from at least 66% of shareholders ii) financial creditors and corporate debtors approving the name of the resolution professional iii) special resolution of 75% of the members of the Corporate Debtor iv) preparation of the base resolution plan by the corporate debtor; is already undertaken before applying to the Adjudicating Authority.
  • Understanding the creditors before making a formal application to AA for approval
    Under this process, the creditors and debtors first work on an informal plan and then apply for initiation of PPIRP to the AA for approval. So in a way, it becomes a joint application by Corporate Debtor and Financial Creditor thereby reducing the chances of objections against the initiation of PPIRP. Further, it also becomes easy for the banks and financial institutions to audit objections, and objections from RBI are also likely to be less as the NCLT has already accorded its approval.
  • Management Control remains with the Corporate Debtor
    Under this process, the management control continues to be with the Corporate Debtor so there is no disturbance in the routine management of the business. Unlike in the CIRP process where management vests with the Interim Resolution Professional (IRP) making it impossible for him to manage a business of which he has no idea. So in PPIRP, effective management can be ensured.
  • Corporate Debtor is allowed to partner with another person
    Under this process, the base resolution plan is submitted by the corporate debtor either individually or jointly with another person. Explanation 1 to section 54K of IBC provides for the same. This allows the corporate debtor to work with financial or technical or marketing partners to submit the best possible resolution plan.
  • Base Resolution Plan is a good starting point
    Under the PPIRP, the management of the corporate debtor determines the manner of recovery. The management has inside knowledge of the business and there is no impairment of operational creditors making the base resolution plan acceptable by the CoC, with some improvements.
  • Swiss Challenge method to make the best possible resolution plan
    The PPIRP regulations provide for the ‘Swiss Challenge’ where an interested party initiates a proposal for a contract or bid for a project. The details of the project are provided to the public and proposals are invited from interested parties to execute it. The Swiss challenge is a mixture of both an open auction and a closed tender to discover the best price for an asset. Further, regulation 48(3) of the IBBI (Pre-packaged Insolvency Resolution Process) Regulations provides the manner for improving the plan.
  • Fast approval and reduced burden on NCLT
    As there is an informal understanding between the financial creditors and corporate debtors, obtaining approval becomes fast as there is very less possibility of opposition to the resolution plan so a detailed examination of the issues will also not be required.
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Conclusion

In conclusion, it can be put succinctly that the Pre-packaged Insolvency Resolution Process mechanism aims to attain the objective promulgated by the IBC. It enables the Corporate Debtor to make a bonafide attempt to revive its business by clearing all the defaults. It also keeps a check that no Corporate Debtor misuses the provision of PPIRP and prejudices the interest of the stakeholders.

Also Read: Pre-pack Insolvency Resolution Process Regulations for MSMEs

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