The pandemic highlighted the need for a specialised insolvency mechanism to support financially distressed micro, small, and medium enterprises (MSMEs). On 4 April 2021, the government promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021, to introduce a Pre-Pack Insolvency for MSMEs (PPIRP)facing financial issues because of the pandemic.Â
Understanding Pre-Pack Insolvency for MSMEs
The Insolvency and Bankruptcy Code, 2016 (IBC) governs the PPIRP under Chapter III-A, and since its establishment in 2021 its importance for MSMEs has been recognised:
What is the Pre-Packaged Insolvency Resolution Process?
Pre-Pack Insolvency for MSMEs is a debtor-in-possession mechanism introduced under the IBC for MSMEs that is a quicker, informal and collaborative process with creditors without initiating formal insolvency proceedings. It also involves re-negotiated resolution plans between debtors and creditors and MSMEs can restructure their debts while maintaining operational control of their business. In formal proceedings under the IBC, the corporate insolvency resolution process (CIRP), is available for all companies facing insolvency issues, where the management control is given to the resolution professional. On the other hand, Pre-Pack Insolvency for MSMEs involves shorter timelines, reduced litigation, and is more cost-effective, in comparison with the corporate insolvency resolution process.
Why is PPIRP Critical for MSMEs?
Pre-Pack Insolvency for MSMEs play a crucial role in the nation’s economy by significantly contributing to GDP, generating large-scale employment, fostering entrepreneurship, and enabling faster adaptation to market changes. These businesses are vulnerable to financial distress due to lack of access to capital, market volatility, and delayed payments. MSMEs can opt for a faster, more cost-effective, and streamlined way to resolve financial distress compared to traditional insolvency proceedings with PPIRP. It provides a time-sensitive solution to insolvency, helping MSMEs survive and revive.Â
Key Benefits of Pre-Pack Insolvency for MSMEs
Faster Resolution with Minimal Disruption:
Under section 54D, PPIRP must be completed within 120 days from the insolvency commencement date. The shorter timeline reduces disruptions to business operations and disc
Cost-Effectiveness:
Pre-Pack Insolvency for MSMEs is more affordable than CIRP, particularly for MSMEs with limited resources. The feature of pre-negotiated plans between the corporate debtor and its creditors reduces the need for prolonged litigation.
Stakeholder Collaboration:
This process also promotes a debtor-creditor consensus before initiation, reducing adversarial proceedings and fostering trust between the stakeholders. Therefore it creates a win-win situation.Â
Key Challenges in Adopting PIRP for MSMEs
Although PPIRP was introduced to streamline the insolvency process for MSMEs, there remain certain issues in practice, including:
Read more : Principle of Equitable Treatment Under Insolvency Law
Low Awareness Among MSMEs:
MSMEs are often unaware of the available PPIRP option, which affects adoption rates. The Insolvency and Bankruptcy Board of India (IBBI) can introduce financial literacy and outreach programs to tackle this issue.Â
 Reluctance of Creditors:
The creditors of MSMEs may be hesitant to accept PPIRPÂ due to perceived risks of inadequate recovery and reluctant to negotiate with such financially distressed businesses.
Regulatory and Procedural Hurdles:
The PPIRP includes procedural requirements such as pre-negotiating resolution plans before initiating formal insolvency proceedings, verification of claims, etc. These requirements make it challenging to implement PPIRP and require clarity regarding eligibility for resolution applicants and operational aspects.
Lack of Sector-Specific Customization:
The current framework does not account for industry-specific challenges faced by MSMEs across sectors like manufacturing, services, and agriculture.
Muted Adoption Rates:
The PPIRP has not been utilised by MSMEs despite its design to provide a quicker and more efficient resolution mechanism. This is due to the creditor’s hesitation regarding potential haircuts, promoter discomfort with the process, and lack of awareness about its benefits.Â
Global Best Practices in Pre-Pack Insolvency
Insights from the UK and US:
The pre-pack insolvency process has had more success than India, due to its faster timeline and ability to maintain operational control while negotiating with creditors beforehand. However, the effectiveness can vary significantly depending on the company’s situation and creditor composition. In the UK, this process is generally considered positive for preserving businesses and jobs, but with concerns regarding the treatment of unsecured creditors. The use of pre-negotiated resolutions is to minimise delays and mechanisms for transparent valuation and creditor engagement.
Lessons for India:
India can adopt certain concepts from the US or UK to overcome the current challenges. These concepts can encourage active creditor participation and enhance transparency in valuation and negotiations.
Recommendations to Boost PIRP Adoption for MSMEs
To adopt theories from foreign pre-pack insolvency proceedings and address the current legal and procedural barriers, policymakers, insolvency professionals, and MSMEs are recommended to:
Awareness and Capacity Building:
Awareness among the stakeholders is the foremost issue in implementing PPIRP. Hence, the IBBI should conduct workshops, seminars, and outreach programs to educate MSMEs about PIRP.
Simplifying Regulatory Framework:
To reduce proven procedural hurdles it is important to introduce clear guidelines for MSMEs and insolvency professionals.
Incentivizing Creditor Participation:
The IBBI and insolvency professionals can offer certain incentives to creditors to build confidence in PIRP processes.
Customizing PIRP for MSME Sectors:
To address the lack of sector-specific insolvency regulations, there is a need for developing industry-specific guidelines to address unique challenges faced by MSMEs across various sectors.
Strengthening Institutional Support:
It is recommended that the IBBI enhance the role of the National Company Law Tribunal (NCLT) and insolvency professionals streamlining PPIRP.
Case Studies and Examples
The successful implementation of PPIRP is demonstrated in the case of GCCL Infrastructure and Projects Limited. In this case, an MSME initiated a PPIRP under the IBC, making it one of the first cases to use this process in India. GCCL presented a pre-prepared resolution plan to its creditors, outlining how they would address their debts and restructure the company’s finances. During this process, the creditors had an opportunity to review and vote on the proposed resolution plan. It allowed GCCL to continue operating as a going concern while undergoing the resolution process.
Conclusion
PPIRP allows for a quicker turnaround for distressed businesses and minimises disruption to operations to traditional insolvency proceedings while still safeguarding creditor interests. It is a hybrid solution between formal and informal insolvency proceedings. PPIRP significantly reduces the time needed to resolve financial distress compared to the standard CIRP. As MSMEs remain in control throughout the process, they can continue operations while working towards a resolution plan. It encourages active participation from creditors by allowing them to negotiate the terms of the resolution plan before formal proceedings. This can potentially lead to better outcomes for all stakeholders. However, awareness is the primary issue in its implementation. Regulatory reforms and encouraging collaboration between stakeholders can effectively tackle this challenge.