The implementation of the pre-pack insolvency resolution process (PPIRP) under the Insolvency and Bankruptcy Code (IBC) has been a significant step towards providing insolvent micro, small, and medium enterprises (MSMEs) with a fresh start.
Introduced in April 2021 via an ordinance, the PPIRP aims to offer a more efficient and less disruptive way to restructure stressed assets, particularly for MSMEs. While the framework has shown promise in some areas, it has also faced challenges, raising doubts about its feasibility for larger corporations.
Objectives
Pre-pack insolvency allows debtors and creditors to negotiate a resolution plan before initiating insolvency proceedings. Once agreed upon, the plan is submitted to the National Company Law Tribunal (NCLT) for quick approval, ensuring minimal disruption to the business. The primary objectives of PPIRP include value preservation, time-bound resolution, and a debtor-in-possession framework tailored to the needs of MSMEs.
Journey so far
The progress of PPIRP has been mixed. The number of MSMEs opting for this process has been lower than anticipated. Vinod Kumar, President of India SME Forum, mentioned that there have been only 13 PPIRP applications to date, with five resolution plans approved, one case withdrawn, and seven ongoing. The recovery rate for creditors under PPIRP has been significantly lower compared to the traditional Corporate Insolvency Resolution Process (CIRP).
Challenges such as banker reluctance, promoter hesitation, and delays in the NCLT approval process have hindered the widespread adoption of PPIRP. The requirement for creditor approval of the resolution plan with a 66% voting share has also presented obstacles, particularly in cases where creditor representation is fragmented.
Benefits for small biz
The key benefits of PPIRP for MSMEs include reduced costs, operational continuity, flexibility in negotiations, and protection against liquidation. Hari Hara Mishra, CEO of the Association of ARCs in India, likened pre-packaged insolvency to a public-private partnership in infrastructure. The process needs simplification and potentially broader application beyond MSMEs to fuel entrepreneurship.
Extension of scheme
The extension of PPIRP to large corporations is a topic of debate. While proponents argue that pre-pack insolvency could offer similar advantages to larger entities, the current framework is primarily designed for MSMEs. Before considering expansion, wider adoption by the MSME ecosystem is crucial. Adaptations for larger firms would be necessary, including eligibility criteria, processes, and roles of insolvency professionals to ensure fairness and efficiency.
Overall, the PPIRP holds promise for reviving distressed MSMEs, but further enhancements and wider adoption are needed to make it a more viable option for all types of businesses.
