Efficacy Of PPIRP For MSMEs – Transforming A Utopian Concept Into Reality

1. Introduction: Need for streamlined MSME Insolvency Regime

1. Origin of PPIRP

Pre-Packaged Insolvency Resolution Process (PPIRP) symbolises a crucial and targeted legislative evolution within the Indian framework of Insolvency i.e. Insolvency and Bankruptcy Code (IBC), 2016. PPIRP has been formulated with purpose to address the financial challenges faced by MSMEs by implementing a streamlined, hybrid mechanism designed to ensure maximum preservation of claim value.

• Need of PPIRP

The long impending need for introducing such concept had peaked during the economic crisis precipitated by the COVID-19 pandemic, which placed numerous MSMEs, considered the backbone of the India’s economy, at the brink of collapse. Realising need for a swift yet comprehensive rescue tool, the Central Government, on April 4, 2021, promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021. This step was subsequently codified by inserting Chapter III-A (Sections 54A to 54P) into the IBC, supplemented by the necessary Rules and Regulations.

Moreover, the conventional Corporate Insolvency Resolution Process (CIRP) when applied to the MSME sector would not serve in the best interests of stakeholders since CIRP operates on a “Creditor-in-Control” model which would mandate a shift of the overall management upon initiation. Although this ensures trust and safety for bigger corporations, yet for MSMES, which rely heavily on promoter relationships, specialized knowledge, and established operational goodwill, this transfer of control often proves fatal. This leads to loss of suppliers and customer relationships and high administrative costs that severely harm the enterprise’s value as going concern.

PPIRP aims to overcome these shortcomings by offering mechanism which is time-bound, cost-effective, and less complex, specifically aiming for completion within 120 days. By prioritizing operational continuity and utilizing pre-negotiated resolution terms, PPIRP provides a tailored remedy intended to achieve better outcomes for stakeholders than the traditional, one-size-fits-all CIRP.

• Amendments made to IBC 2016 for Incorporating PPIRP

In 2021, the Act introduced Chapter III-A and thereby laid the primary prerequisites and eligibility for initiating the process under Section 54A. The same are as follows:

1. Corporate Debtor (CD) must not have undergone CIRP or PPIRP in the preceding three years.
2. CD must not be undergoing CIRP and ought to be eligible under Section 29A of the Code (i.e. prerequisite for a Resolution Applicant to submit Resolution Plan).
3. No order requiring it to be liquidated is passed under section 33
4. Financial Creditors, not being related parties have proposed the IRP’s name

1. Procedural Architecture: Navigating through PPIRP:

The impact and efficacy of PPIRP stands solely upon its meticulously crafted procedural framework, which mandates intensive stakeholder collaboration prior to conventional court involvement.

1. Pre-Initiation Consensus and the formation of CoC

Unlike CIRP, PPIRP begins with significant procedural requirements that must be satisfied before filing an application with the Adjudicating Authority (AA). The CD must secure the approval for PPIRP initiation from unrelated Financial Creditors (FCs) representing not less than 66% in value of the total financial debt. This high consensus threshold is essential, as it transfers the burden of negotiation and strategy formulation from the court to the stakeholders, guaranteeing the highest amicable result possible.

1. Debtor-in-Continued-Possession of CD

The primary governance model which stands out in PPIRP is the ‘Debtor-in-Possession’ (DIP) framework which has been defined in Section 54H. The management of the CD retains control over its operations throughout the resolution process. This is central to preserving the business’s continuity, maintaining sensitive trade relations, and safeguarding employment.

1. Appointment of an IP as RP via unanimity

Selecting the Resolution Professional (RP) is a very crucial pre-initiation step. The CD must secure the approval of unrelated FCs representing at least 66% of the financial debt for the proposed IP.

However, the PPIRP model is devised as a hybrid being the “Debtor-in-possession with Creditor-in-control”. While the debtor manages day-to-day affairs, the process is to be overseen by the Resolution Professional (RP) and the CoC.

1. Negotiations and Preparation of Resolution Plan

This phase comprises of comprehensive, confidential negotiations between CD, Financial Creditors and other stakeholders to frame a viable revival strategy and finalise mutually acceptable terms. This backend preparation results in the making of Base Resolution Plan (BRP). This BRP forms as CD’s proposal to revive its business which is then submitted to AA upon approval from the CoC along with the application for initiation of PPIRP. Timelines to complete the entire PPIRP is within 120 days from commencement and only the RP is authorized to submit the CoC-approved resolution plan to AA within the first 90-day period.

• Submitting Resolution Plan to AA (NCLT)

The mechanism for approving the BRP ensures fair opportunity to CD itself for proposing a plan to the CoC which can be approved by them later upon consideration of other plans submitted, as long as the BRP does not impair claims owed to Operational Creditors. The BRP could also be considered for approval in case no resolution plan is received from any Resolution Applicants. if the Best Alternate Plan (BAP) submitted by Resolution Applicant is significantly better than BRP the same could be considered for approval. Thereafter the final PPIRP is submitted to NCLT for approval.

1. Critical Analysis: Risks and Rewards with PPIRP:

1. Rewards of PPIRP are primarily etched in its contrast with the aspects where CIRP has its shortcomings:

1. Control and Continuity: The Debtor-in-Possession (DIP) model is of utmost value for MSMEs. By permitting the existing management to retain control, PPIRP ensures there is diminished disruption to day-to-day operations, and this continuity safeguards several assets such as corporate goodwill, brand reputation, and customer-supplier chain etc. that are essential for the MSME’s survival.

• Speed and Efficiency: One of the biggest advantages of PPIRP is the mandated 120-day timeline for completion, including the 90 days for CoC to approve the plan and subsequent 30 days for AA to approve it. Since significant backend work, negotiation, as well as preparation of BRP is achieved before the formal submission before submitting the same to AA and hence the timeline of judicial scrutiny is reduced majorly.

• Cost-Effectiveness: PPIRP lowers the procedural and administrative costs compared to CIRP. This is attributed to the continuation of existing management running the operations and cut-down of high cost of procuring a Resolution Professional to take complete charge. The concept of out-of-court negotiation also aids in cutting down litigation costs manifold and makes the resolution financially beneficial for the already distressed CD.

• Collaborative effort: Requirement for 66% Financial Creditors’ approval for filing the Resolution Plan paves way for a non-adversarial, co-operative approach. By building synergy among stakeholders upfront, PPIRP reduced the likelihood of future disputes and delays, fostering trust among stakeholders pertaining the revival strategy.

• Safekeeping of company value and flexibility: PPIRP facilitated resolution without immediate public scrutiny of a full-blown CIRP, thereby protecting enterprise value and goodwill. The flexibility is facilitated on account of the ability of debtor and creditors to negotiate a well-fitting restructuring plan that ensures flexibility which rigid statutory processes often lack.

1. Risks and drawbacks associated with PPIRP arise out of the practical implementation of PPIRP which has revealed critical contingencies that undermine its promised efficacy, mainly with respect to its speed and trust of stakeholders

1. Continued reliance on NCLT for finality and time lapse: one of the primary challenges facing PPIRP is the inherent failure for adhering 120-day resolution limit, majorly on account of continued judicial intervention and reliance on NCLT for every step of the way. Even though AA is expected to admit the application within 14 days, the NCLAT has cemented its position that NCLT has right to entertain objections from objectors and interveners during the admission phase, albeit only in exceptional cases. This judicially liberal approach for objections defeats the intended swift resolution into a protracted legal battle, repeating the delays observed in CIRP.

An analysis of certain admitted PPIRP cases would confirm this depletion of timelines:

Sr. No.	Case Name (NCLT Bench	Date of Admission	Date of Resolution	Actual Duration (Days)	Statutory Deviation
	Sudal Industries Ltd. (Mumbai)	20.04.23	10.08.23	112	Within Target (120 days)
	Shree Rajasthan Syntex Ltd. (Jaipur)	19.04.23	22.08.23	125	Minor Overshoot
	GCCL Infrastructure & Projects Ltd.	14.09.23	05.09.23	721	Extreme Overshoot
	Loon Land Developers Ltd. (New Delhi)	29.11.21	Withdrawn

Studying the case of GCCL Infrastructure & Projects Ltd. in detail, it was observed that NCLT’s scrutiny into the commercial wisdom of CoC led to the vast delay. This judicial tendency contributes to the fact that PPIRP can only be considered truly faster than CIRP when restructuring negotiation is straightforward and consensus is absolute.

• Creditor’s hesitation in proceeding with Debtor-in-Possession model: Although, the DIP model is operationally beneficial, it carries the inherent risk of continued management incompetence where promoters might misuse their continued control. This scepticism is particularly prevalent among major financial institutions such as Public Sector Banks which are reluctant to engage in informal, behind-the-scene negotiations with CD’s promoters. Most prefer conventional safety and transparency entailed in the formal CIRP structure and open public bidding.

1. Comparative Analysis with Foreign Legislations (USA & U.K)

India’s PPIRP framework is result of a comprehensive analysis and convergence of foreign PPIRP legislations which belonging to advanced jurisdictions, mainly the United States of America and United Kingdom.

1. United States Bankruptcy Code – Chapter 11:

This legislation lays down the conceptual foundation for India’s DIP model. US pre-packs involve the CD negotiating a plan for reorganization and garnering creditor votes before any CD files for bankruptcy, following which the process is formalized in court. This chapter provides for the debtor to maintain operations under management control however being supervised by a committee of unsecured creditors.

1. Objective: The primary goal for the legislation of both the nations is the CD’s reorganization and to prevent the entity from being a going concern which thereby simply selling off its assets.

• Mechanism: USA – The CD negotiates a plan with its key creditors and draws up a plan of reorganization. This plan is further negotiated upon to finally result into a “Restructuring Support Agreement” (RSA) wherein all major creditors finally formally commit to voting in favour of the plan.

India – The CD here ought to get approval from the CoC for its submitted BRP and at the same time CoC also calls for other applications (BAP) for comparing which would finally benefit the stakeholders more and then submit the same to NCLT.

• Eligibility:  USA – The pre-packaged insolvency resolution is available to all corporations, though their high costs complexities point to the tendency of only the large corporations being able to use it.

India – The PPIRP is exclusively available only for MSMEs (Micro, Small, and Medium Enterprises) that are incorporated as companies or LLP and have committed default of at least ₹10,00,000/-.

1. United Kingdom’s Pre-Pack Administration under Insolvency Act 1986:

1. Control: India – It is a “Debtor-in-Possession” (DIP) model where the existing management stays in control.

UK: It is an “Administrator-in-Control” model. An Insolvency Practitioner (IP) is appointed as an Administrator and immediately takes full control of the company, displacing the existing management.

• Objective: India – Objective herein is always to save the CD as a going concern through a reorganization plan.

UK – The objective is to rather rescue the viable business and assets, not the CD itself. This is often achieved through a rapid, pre-arranged sale of business to a new entity. The original CD entity is then liquidated.

• Transparency: India – Process is very transparent and framed to maximise value. The concept of inviting offers from other Resolution Applicants to submit Resolution Plans BAP and then pick the best plan, helps to redeem the most out of distressed CD.

UK – Its model is significantly criticized for its lack of transparency. The sale is negotiated in private by the IP before its appointment executed immediately afterwards. This often leads to “phoenix” sales wherein the entity is sold back to owners at a price that unsecured creditors deem to be very low.

• Recommendations & In Sum:

PPIRP is a conceptually powerful mechanism designed to offer timely, cost-effective relief to stressed MSMEs by utilizing the Debtor-in-Possession model and strong creditor consensus. However, the pattern of implementation so far has pointed out that the path from utopian concept to a functional reality is encumbered with systemic hurdles like judicial roadblocks and trust deficits from creditors. The following recommendations can aid in paving the way for this transition:

1. Enforce strict Judicial adherence to timelines

NCLT ought to resort to practising limited judicial review, mainly restricting its scope of interference to commercial wisdom of the CoC, especially when the statutory safeguards such as DiP model and inviting BAPs from outside entities, have been met. Section 54D entails the 12-day deadline and the same ought to be treated as mandatory to ensure uniformity and precedents for future.

• Set standard engagement protocols for Financial Creditors

The IBBI, in coordination with RBI, should frame statutory internal guidelines for Financial Institutions such as Public Sector Banks outlining clear procedures for evaluating and participating in pre-pack negotiations. An established set of guidelines is crucial to overcome the innate reluctance of banks to engage in informal negotiation with promoters.

• Ensure protection of Operational Creditors

Well-rounded, holistic mechanisms ought to be explored for providing OCs with a greater voice, perhaps through a non-voting advisory role in the CoC or via enhanced protection measures beyond the minimum liquidation value, given the crucial value that trade creditors bring to MSME’s continuity.

• Develop Code of Conduct for DIP Management

Given the risks associated with the Debtor-in-Possession model, a specific Code of Conduct should be instituted for the management of the Corporate Debtor (CD). This mandatory guideline would clearly outline fiduciary responsibilities, transparency requirements, and restrictions on dealing with avoidance transactions during the pre-pack phase, thereby addressing creditors’ concerns regarding moral hazard and potential misuse.

By Pranav Diya, Associate, under guidance of Nitin Jain, Partner

The views expressed in this article are solely those of the authors and do not necessarily reflect the views of the Firm.

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