The introduction of the pre-pack insolvency resolution process (PPIRP), under the Insolvency and Bankruptcy Code (IBC), is a significant attempt to give insolvent micro, small, and medium enterprises (MSMEs) a fresh lease of life.
Launched in April 2021 through an ordinance, the PPIRP aims to serve as an efficient and less disruptive means of restructuring stressed assets, particularly for MSMEs.
While the framework has shown promise in some areas, the journey so far has also been marked by challenges, raising questions over the feasibility of extending this mechanism to large corporations.
Objectives
Pre-pack insolvency allows a debtor and its 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 swift approval, ensuring minimal disruption to the business.
The primary objectives of PPIRP include preservation of value; time-bound resolution; and a debtor-in-possession framework. PPIRP was designed specifically with MSMEs in mind, given their resource constraints and need for quicker resolutions.
Journey so far
PPIRP has elicited mixed results so far. The number of MSMEs using it has been less than anticipated.
Vinod Kumar, President, India SME Forum, says there have been only 13 PPIRP applications till date, of which five resolution plans have been approved, one case was withdrawn, and seven are ongoing. “The recovery rate for creditors under PPIRP has been significantly less compared with the traditional Corporate Insolvency Resolution Process (CIRP).
“Many bankers are hesitant to approve PPIRPs over concerns that it is less regulated than CIRPs. So, traditional insolvency processes are more preferred,” Kumar says.
Promoters of defaulting MSMEs, too, hesistate to initiate a PPIRP due to the scrutiny involved and the delegation of power to resolution professionals.
Another deterrent is the lack of a robust adjudicating infrastructure, which can delay case resolutions, according to Kumar.
Moreover, the delays in NCLT approvals across the insolvency ecosystem have impacted PPIRP cases too.
The requirement for creditors to approve the pre-pack resolution plan with at least 66 per cent voting share has created another set of hurdles, particularly in cases where creditor representation is fragmented.
Many creditors also worry that the debtor-in-possession framework may be misused by promoters to delay repayments.
Benefits for small biz
The key benefits of PPIRP for MSMEs include reduced costs; operational continuity; flexibility in negotiations; and protection against liquidation. These benefits are part of the government’s broader goal of supporting MSMEs, which contribute nearly 30 per cent to GDP and employ over 110 million people.
Hari Hara Mishra, CEO, Association of ARCs in India, compares pre-packaged insolvency to a public-private partnership (PPP) in infrastructure.
While the formal approval of NCLT gives it sanctity and finality of outcome, the process should be left largely flexible for the participants in the process, he says.
“The process needs more simplification, and possibly extended beyond MSMEs, while protecting creditors for taking tough decisions such as deep haircuts. Only when units can come out of bankruptcy and make a fresh start will there be a growth in enterpreneurship — one of the basic goals of IBC,” Mishra says.
Lack of awareness, coupled with procedural complexities, is deterring MSMEs from leveraging this framework, says Vivek Iyer, Partner and National Leader-Financial Services Risk Advisory, Grant Thornton Bharat.
Lenders, including banks and non-banking financial companies (NBFCs), can facilitate awareness generation within the MSME ecosystem, he adds.
Extension of scheme
The extension of PPIRP to large corporations is a matter of debate. Proponents argue that pre-pack insolvency could bring similar benefits of speed, cost-effectiveness, and operational continuity to larger entities.
Iyer thinks it would make sense to cover large companies too, but only after wider adoption by the MSME ecosystem. The primary aim of the pre-packaged insolvency system is to protect those who do not have the clout to drive a negotiation, he points out.
A legal framework helps provide comfort to both debtor and creditor, he adds.
Kumar observes that many large companies face cyclical downturns, leading to financial distress. A pre-pack mechanism could offer them a structured means to negotiate with creditors before reaching a crisis point, including bankruptcy.
Many developed countries employ pre-packaged insolvency processes for larger firms, allowing them to maintain operations while restructuring debts. A similar practice in India could modernise the insolvency framework and align it with global standards, Kumar says.
However, the current framework is primarily tailored for MSMEs, and significant modifications would be needed to accommodate larger firms effectively. This includes defining eligibility criteria, processes, and the roles of insolvency professionals to ensure fairness and efficiency, he adds.