Know About Pre-Pack Insolvency Resolution Process For MSME

63

The resilience and development of MSMEs are essential in the setting of India’s business ecosystem. These enterprises comprise the backbone of the Indian economic system and also contribute considerably to employment generation and GDP. Still, the COVID 19 pandemic of 2020 has ravaged this sector, rendering several MSMEs insolvent. Conscientious of this crisis, the Indian government launched a Pre-packaged Insolvency Resolution Process (PPIRP) aimed at MSMEs.

Understanding PPIRP

The PPIRP is a new provision introduced in India’s Insolvency resolution framework by the Insolvency & Bankruptcy Code (Amendment) Ordinance, 2021. This particular ordinance modifies the Insolvency & Bankruptcy Code (IBC, 2016) to make a pre-packaged Insolvency resolution procedure for MSMEs. Pre-packaged insolvency is known worldwide; it isn’t new. It’s been implemented in nations like the UK and also the United States. India’s adaptation of this model demonstrates its willingness to produce a favourable business environment.

At its heart, PPIRP is a plan negotiated between creditors and debtors for debt resolution. Unlike the standard Corporate Insolvency Resolution Process (CIRP) under the IBC that is lengthy and subject to value erosion, PPIRP offers a faster, much more effective and cheaper path. It allows the debtor to control the business during the resolution process, minimising disruptions and keeping enterprise value.

Features of PPIRP 

The main features of Pre-packaged Insolvency Resolution Process are:

1. Debtor-in-Possession Model: Unlike CIRP that shifts control to an Insolvency Professional, PPIRP maintains current management.
2. Quick Resolution: PPIRP aims to close insolvency in 120 days versus 330 under CIRP.
3. Cost-Effective: The filing fee is Rs. 15,000 and simplified processes, PPIRP is more economical.
4. Approval of Creditor: The procedure requires prior approval by creditors ensuring buy in from the beginning.
5. Base Resolution Plan: The corporate debtor submits a base resolution plan which may be improved upon by a Swiss Challenge technique.

Regulatory Framework for PPIRP 

The Insolvency & Bankruptcy Board of India (IBBI) is now operationalizing PPIRP. It notified two important regulations on April 9, 2021:

1. Insolvency and Bankruptcy (Pre-packaged Insolvency Resolution Process) Rules, 2021:

These rules establish how to file a PPIRP application. They define the documents, steps and fees to get started.

2. IBBI (Pre-packed Insolvency Resolution Process) Regulations, 2021: 

These regulations state PPIRP in detail, including:

1. Qualification criteria for resolution professionals, valuers along with other experts.
2. Public announcements along with stakeholder claims Process.
3. Information memorandum and creditors meetings guidelines.
4. Procedures for inviting and assessing resolution plans.
5. Provisions for vesting management with the resolution professional in case needed.
6. Conditions for terminating PPIRP.

Application Process for PPIRP

A corporate applicant (generally the MSME itself) should apply under Section 54C (1) of the IBC to initiate PPIRP. The process involves:

1. Fee Payment: 

A non-refundable fee of Rs. 15,000 is needed.

2. Documentation:

• For financial debts: Record of default from information utility.
• For operational debt: Invoice/demand notice &; default record.
• Creditor approval of the appointment of the proposed resolution professional.
• Written consent of the proposed resolution professional.
• Declaration of the majority of directors or partners.
• Special resolution by members or partners.
• Creditor approval for filing PPIRP application.
• Report from the proposed resolution professional.
• Declaration of any scrutinised transactions.
• An affidavit of eligibility pursuant to Section 29A of IBC.
• Relevant books of accounts, audited financial statements.
• Constitutional documents or agreements granting authority to apply.

3. Filing Method: 

Applications preferably are filed online. In case electronic filing isn’t possible, physical submission is accepted with bulky documents provided in a portable form.

4. Notice to IBBI: 

Copies of the application must be delivered to IBBI before filing with the Adjudicating Authority.

5. Filing with Adjudicating Authority: 

The application is filed pursuant to National Company Law Tribunal Rules, 2016.

The PPIRP Process

The Pre-packaged Insolvency Resolution Process involves the following steps:

1. Initiation: The MSME (corporate debtor) begins the procedure with creditor approval.
2. Professional Appointment: The resolution professional is an insolvency professional.
3. Submission of Base Plan: The MSME submits the base resolution plan.
4. Public Announcement: Details are made public to invite claims.
5. Formation of a Committee: A committee of creditors is created.
6. Plan Evaluation: The base plan is assessed along with a Swiss Challenge for much better offers.
7. Approval: The committee approves the best plan.
8. Implementation: The approved plan is implemented.

Benefits of PPIRP for MSMEs

The benefits of PPIRP for MSMEs are as follows:

1. Business Continuity: The debtor-in-possession model keeps uninterrupted operations.
2. Time & Cost Savings: Faster resolution and lower fees keep more value.
3. Confidentiality: Initial negotiations are private to safeguard brand reputation.
4. Customised Solutions: Plans are created based on the MSME requirements.
5. Creditor Confidence: Prior creditor approval helps with execution.
6. Preservation of Value: Quick resolution with minimal disruption preserves asset value.

Challenges & Considerations of PPIRP for MSMEs 

PPIRP has multiple advantages but isn’t without hurdles: 

1. Limited Awareness: Many MSMEs might be oblivious to this option.
2. Creditor Cooperation: Success relies upon creditors being prepared to negotiate.
3. Fairness Concerns: Making sure the base plan isn’t biassed.
4. Professional Expertise: Finding resolution professionals with knowledge of MSME dynamics.
5. Post-COVID Scene: Economic uncertainties may impact plan viability.

Global Context and International Models of PPIRP

India’s PPIRP models are modelled after successful models across the globe: 

1. UK’s Pre-Pack Administration: It is quick and flexible.
2. USA’s Prepackaged Bankruptcy: Popular due to its efficiency.
3. Singapore’s Pre-Pack Model: Focus on debtor-in-possession and fast turnarounds.

India’s PPIRP includes these elements while adapting itself to its MSME sector. This global alignment also makes India appealing to foreigners considering its MSME industry.

Future Role of PPIRP in India’s Economy 

PPIRP becomes a significant tool as India struggles to reach its goal of 5 tn $ GDP. MSMEs tend to be termed as the “growth engines of the economy” and therefore require strong support mechanisms. PPIRP not just provides financial restructuring but a genuine revival. Its success might:

• Promote entrepreneurship by removing the failure stigma.
• Attract more investments into the MSME industry.
• Set a precedent for further insolvency law innovations.
• Help India develop a USD five trillion economy.

But continuous evaluation and refinement will be key. IBBI and policymakers require feedback, analyses of outcomes in addition to data-driven alterations to make sure PPIRP’s long-term effectiveness.

Conclusion

The Pre-packaged Insolvency Resolution Process is more than legal reform; it’s societal change. It reflects India’s intention to cultivate its MSME sector. In a period of imminent danger to a lot of small businesses, PPIRP offers a lifeline – an opportunity to restructure, revive and recover. Its debtor friendly approach backed by creditor safeguards offers a sound base for sustainable resolutions.

PPIRP offers hope as MSMEs confront unprecedented challenges. It indicates that every enterprise, small or big, counts in India’s development story. Blending speed, efficiency and empathy, PPIRP is more than solving insolvencies. It’s reviving the entrepreneurial zeal which has made India progress. In case more MSMEs adopt this process, distress can be transformed into resilience and a far more strong, inclusive economy down the road.

FAQs

What are pre-packaged insolvency resolutions?

The prepackaged insolvency resolution procedure (pre-pack) permits a troubled business to create a resolution plan with its creditors before launching formal insolvency proceedings.

What’s the minimum amount for pre-pack insolvency?

The whole resolution procedure must be finished within 120 days of starting. The pre-packaged insolvency procedure begins once default amount ranges between Rs 10 lakh and Rs 1 crore.

What’s the pre-pack scheme?

The pre-packaged insolvency scheme would not enjoy the moratorium shield as when the case is admitted under section 7 or section 9 of the IBC. The pre-packaged scheme will benefit secured creditors more than operational creditors, who’d have not much say in the negotiations.

How long will the insolvency resolution procedure last?

The CIRP should be completed within 180 days of the date of admission of the application to begin the procedure, as outlined in section 12 (1) of the Code. The Adjudicating Authority can issue a 90 day period extension on a one off basis.

What advantages does pre-pack insolvency provide?

The pre-packaged method eliminates litigation and uncertainty related to traditional insolvency. This makes the overall cost of the resolution lower.