The Pre-Packaged Insolvency Resolution Process was introduced by an Ordinance in 2021 and provides financially troubled Micro, Small, and Medium-Sized Enterprises (MSMEs) with a well-organized framework to promptly and effectively address their insolvency difficulties. We delve into the complexities of the PPIRP in this extensive article, including its governing legislation, eligibility requirements, procedural features, and important considerations.
MSMEs are businesses engaged in the production, manufacturing, and processing of goods and commodities. The government of India initially introduced the concept of MSMEs through the Micro, Small & Medium Enterprises Development (MSMED) Act, 2006.
IBC 2016 (Code)- Chapter III- A, Section 54A- Section 54-P, supplemented by the Insolvency and Bankruptcy (Pre-Packaged Insolvency Resolution Process) Rules, 2021 (Rule), and the Insolvency and Bankruptcy (Pre- Packaged Insolvency Resolution Process) Regulations, 2021 (Regulation).
MSMEs are essential to India's economy. They contribute significantly to GDP and give employment to a large population.
Pre-pack was adopted during the epidemic to ensure that MSMEs, who are considered the backbone of the Indian economy, are not forced into insolvency. The structure was thought to be distinct from conventional CIRP since PPIRP is based on the debtor-in-possession model, which means that the Board of Directors is not dissolved, and management is not transferred to the Resolution Professional. But the Code empowers creditors to replace management with 66% of the vote and the permission of the adjudicating Authority.
The application must include proof of investment in plant and machinery or equipment and turnover in accordance with Ministry of MSMEs Notification No. 2119(E) dated June 26, 2020, or a copy of the most recent and updated Udyam Registration Certificate to demonstrate that the Corporate Debtor is an MSME.
There are certain conditions outlined in Section 54A (2) of the IBC which is needed to be met by the Corporate Debtor to initiate PPIRP.
1. A default of at least Rs. 10 lakhs are committed by the corporate debtor.
2. CD is eligible to submit a resolution plan under section 29A of the code.
3. Is not undergoing a CIRP.
4. Is not required to be liquidated by an order under section 33 of the code.
5. He has not undergone a PPIRP during the three years preceding the initiation date.
6. He has not completed a CIRP during the three years preceding the initiation date.
The PPIRP process can be divided into two Phases: Pre-Initiation and Post- Initiation phase
Getting creditor approval and assembling the necessary proof are the main goals of the pre initiation phase. The post-initiation phase entails applying to the adjudicating body. Unrelated Financial Creditors (UFCs) clearance is required for the CD during the Pre-Initiation Phase. Unrelated Operational Creditors (UOCs) take over the UFCs' obligations if UFCs are not present. Before each meeting, the CD must give notice to its creditors and send them FORM P2, which contains the creditors' information, at least five days in advance. The names of the Insolvency Professionals (IPs) to be appointed for PPIRP may be proposed by any FC with more than 10% of the CD's total financial debt during the meeting. The eligibility requirements for the IP to be appointed are outlined in Regulation 7, and they can be summed up as follows:
The IP must be independent of the CD. The IP's appointment and the start of the PPIRP require approval from the UFCs by a minimum of 66% of votes.
Additionally, in accordance with section 54A(2)(f), the CD's Directors must declare that the CD will submit an application to the Adjudicating Authority (AA) within the allotted time frame, which cannot exceed 90 (ninety) days. Moreover, PPRIP was not founded with the intention of defrauding anyone. The identity and specifics of the IP assigned to PPRIP. For the PPRIP to begin, the company's members or LLP partners must adopt a special resolution. Additionally, CD must develop the Base Resolution Plan (BRP), and an Authorized Representative (AR) is designated for the creditors. Finally, the BRP validates the requirement, and the IP creates the report under Form P8 certifying the CD is qualified for PPIRP.
A base resolution plan under the PPIRP cannot recommend haircuts for creditors. The concept stems from the intrinsic structure and objectives of the PPIRP process, which are defined in several areas of the IBC. Section 54 (particularly the subsections dealing with creditor meetings and voting on the resolution plan) emphasizes creditor control and approval of the plan. Creditors are likely to reject a haircut-based plan during the voting process. Section 12 (CIRP objectives): While this part focuses on the Corporate Insolvency Resolution Process (CIRP), it also discusses the larger purposes of insolvency resolution under the IBC, including corporate debtor rehabilitation. Haircuts, which suggest a reduction in creditor claims, may not be consistent with the PPIRP's goal of resurrecting the company.
After completing the requirements of Pre- Initiation stage, CD files an application to the Adjudicating Authority, accompanied by essential documents such as –
1. Record of Default
2. Consent of IP to be appointed as RP
3. Declarations of Director/partner
4. Member’s Special Resolution.
5. Report by the resolution professional.
6. Financial statements of last 2 years.
7. Proof of CD being a MSME- registration certificate.
8. Affidavit under 29A eligible to submit Resolution Plan for PPIRP.
9. Other further documents.
Within the allotted period, the AA assesses the application and decides whether to accept or reject it based on compliance and completeness. Following admission, the PPIRP begins with the designation of an IP as the resolution professional (RP) and a moratorium period.
Section 54E if the IBC, 2016 deals with the moratorium. The moratorium begins when the Adjudicating Authority (AA) accepts the application for PPIRP. In addition to admitting the application, the AA issues an order declaring a moratorium. The PPIRP itself is time-bound, often needing completion within 120 days of the start date. As a result, the moratorium lasts until the end of the PPIRP, unless it is lifted earlier.
During the post-initiation phase, the CD's management retains operational control, with directors/partners required to preserve the entity's value and assets. However, the committee of creditors (COC) may resolve to shift management to the RP if judged necessary, subject to AA approval. The RP handles many functions, including COC development, appraisal of the BRP etc.
Within seven days of the PPIRP's approval, the RP establishes the COC after the AA approves the application. After that, the RP presents the BRP that the CD has suggested to the COC for approval. If it is accepted, the BRP is then forwarded to the AA for approval. However, the RP welcomes the Best Alternate Plan (BAP) from third parties integrating the Swiss Challenge principles in PPIRP if the BRP is rejected by the COC or if it negatively affects the Operational Creditors. The requirements for the criteria that the RP must announce before inviting the BAP are outlined in Regulation 43 of the Regulation. Following the submission of Resolution Plans by multiple parties, the RP assesses each one and, using a set of scoring criteria, determines the BAP.
Should the BAP prove to be notably superior to the BRP, it could be presented to the COC for approval. If BAP does not outperform BRP by a substantial margin, RP will reveal the results of the BRP and BAP, allowing the submitter and CD to refine their competing plans. The plan with the highest score will be considered for approval prior to reaching COC, after which it will be forwarded to the AA for approval.
After receiving an application, the AA will review the plan that the COC approved and decide whether to approve it or reject it.
In either instance, the PPRIP will be closed with a resolution plan or, if one is not, without one. The pre pack insolvency process can end in several ways: approval of the resolution plan by the Adjudicating Authority (AA), termination by the Committee of Creditors (CoC) or AA under certain conditions, commencement of the Corporate Insolvency Resolution Process (CIRP) as decided by the CoC, or liquidation ordered by the AA if the approved plan does not involve a change in control or management.
It is crucial to emphasize that the pre-pack process is an invaluable addition to the bankruptcy settlement framework that the Code has established. While PPIRP undoubtedly benefits from ease of use, there are numerous disadvantages as well. However, it does offer a uniform process and framework that support the resolution of troubled assets and guarantee stakeholder protection.
Shalini Vasishtha, a lawyer and trainee at Ancoraa while pursuing a postgraduate insolvency program, possesses a comprehensive grasp of insolvency, bankruptcy, and restructuring. With previous experience as a legal blog writer, she adeptly intertwines her expertise in her writings, providing invaluable insights for navigating the intricate complexities within the realm of insolvency.
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