Status as on- 09/01/2023
In the wake of the Covid pandemic, a Pre-Packaged Insolvency Resolution Process (for short “PPIRP”) came into existence in April 2021 by way of an amendment in the Insolvency and Bankruptcy Code, 2016 (for short “I&B Code”) to deal with the stress of these small companies. The idea was that resolution of distressed MSMEs require different solution due to the unique nature of their businesses. Micro small and medium enterprises (for short “MSME”) are the strength of the Indian economy. They generate millions of jobs and the health of these companies is crucial for sustained growth.
PPIRP is an alternate and speedier resolution mechanism for MSMEs in financial distress.
However, the scope of PPIRP is larger than just Covid stress. It seeks to achieve quicker, cost-effective, and value-maximizing resolution and at the same time make it the least disruptive for the continuity of businesses. The entire resolution process has to be completed within 120 days from the date of initiation.
If the default amounts somewhere around between Rs.10 lakh to Rs.1 crore, the PPIRP kicks in. If the defaults are higher than the said amount, a Corporate Insolvency Resolution Process under the IBC would be initiated.
However, only a few cases have been admitted so far under the pre-packaged insolvency process, which is quite low. In the CIR Process, Resolution is a last resort and in the pre-packaged process, it is voluntary. Banks are supposedly not willing to initiate pre-packaged insolvency processes due to voluntary haircuts.
The PPIRP includes the MSMEs within its ambit since the MSMEs have been severely affected by the pandemic. According to a survey conducted by National Small Industries Corporation Ltd (NSICL), approximately 10% of the MSMEs had to shut down due to COVID- 19. However, there are a set of conditions as to who fall within the ambit of MSMEs under the Micro, Small, and Medium Enterprises Development Act, of 2006.
As per this mechanism the financial creditors can accept or reject the Base Resolution Plan (BRP) submitted by a Corporate Applicant. If the Financial Creditors (FC) accept the BSP submitted by the corporate applicant and thereafter, sent for the approval of the NCLT. The PPIRP has become increasingly popular in Europe and is already in function in the UK.
BENEFITS OR ADVANTAGES OF PPIRP AS COMPARED TO CIRP
One of the most important reasons for introducing the PPIRP Mechanism was to eliminate drawbacks that were present in the existing CIRP mechanism. The benefits or advantages of the PPIRP as compared to the existing CIRP mechanism are as follows:
PPIRP involves preliminary work before filing the application before NCLT.
In CIRP no preliminary steps are involved before filing an application before the adjudicating authority (AA). However, in the case of PPIRP, proper steps are involved before filing an application before the adjudicating authority (AA). The PPIRP process commences only after 66% of the financial creditors approve the PPIRP and the name of the resolution professional (RP) is confirmed. The special resolution passed by the corporate debtors on the approval of 75% of members, preparation of the Base Resolution Plan by the Corporate debtor, and approval of the name of the Resolution Professional by financial creditors and corporate debtors.
Thus, preliminary work or initial work is already done before the filing of the application before the adjudicating authority (AA) which makes the process less, and also a formal understanding is reached between the corporate debtors and financial creditors.
Pre- Packaged Insolvency Resolution Process (PPIRP) definitely tries to eliminate the difficulties that were present in the CIRP (Corporate Insolvency Resolution Process) by providing a time-bound resolution process. It also tries to reduce the intricacies that were present in the CIRP process by incorporating both informal as well as formal insolvency processes. The main objective behind the incorporation of PPIRP is to restore the MSMEs to their normal position as due to the outbreak of COVID-19, a lot of MSMEs were on a brink of insolvency. The safeguards and measures adopted in the PPIRP mechanism have helped the MSMEs to a great extent in order to revive their operations as a going concern. Hence, it can be said that the PPIRP provides for a better insolvency resolution process as compared to the traditional CIRP process.
Disclaimer: The above article is based on the personal interpretation of the related orders and laws. The readers are expected to take expert opinions before relying upon the article. For more information, please contact us at firstname.lastname@example.org & email@example.com