Pre-Packaged Insolvency Resolution Process (PPIRP) under IBC

Exploring the Pre-Packaged Insolvency Resolution Process (PPIRP) under the Insolvency and Bankruptcy Code (IBC)

ABSTRACT:

In recent years, the Insolvency and Bankruptcy Code (IBC) in India has undergone significant reforms to enhance the efficiency and effectiveness of insolvency resolution processes. One such innovation introduced under the IBC is the Pre-Packaged Insolvency Resolution Process (PPIRP). The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 promulgated on 4th April, 2021 provides for pre-packaged insolvency resolution process (PPIRP) for corporate debtors classified as micro, small and medium enterprises. The Insolvency and Bankruptcy Board of India notified the Insolvency and Bankruptcy Board of India (Pre-packaged Insolvency Resolution Process) Regulations, 2021 (PPIRP Regulations) to enable operationalization of PPIRP. This was enacted to provide ‘PPIRP’ as an alternative to Corporate Insolvency Resolution Process (“CIRP”) to mitigate the financial distress caused by the Covid-19 pandemic to MSMEs. In this comprehensive guide, we will delve into the concept of PPIRP, its differences from the regular insolvency resolution process, its benefits, a landmark judgement and the procedural requirements for initiating PPIRP.

Understanding Pre-Packaged Insolvency Resolution Process (PPIRP): –

PPIRP is essentially a pre-arranged insolvency resolution plan between the distressed company and its creditors. PPIRP was introduced in India through an amendment to the IBC in 2021, which inserted a new Chapter III-A. This chapter provides for the submission and approval of pre-packaged plans and specifies the eligibility criteria for debtors and creditors who can initiate the process. The proposal for PPIRP of a corporate debtor must be approved by at least 66% of its financial creditors before the application for PPIRP is filed before the Adjudicating Authority. This mechanism allows the debtors and creditors to negotiate and agree upon the terms of the resolution plan before formally initiating the insolvency process under the Insolvency and Bankruptcy Code (IBC). The minimum amount in default must be INR 10,00,000. The entire resolution process is required to be completed within 120 days of commencement of PPIRP.

Illustrative Example:

ABC Electronics Pvt. Ltd., is facing a ₹2,50,000 debt amid declining demand, proposed a Pre-Packaged Insolvency Resolution Plan (PPIRP). Negotiating with major creditors DEF Bank and supplier PQR, they agreed to reduce the debt to ₹1,00,000, extending the repayment period. After NCLT approval, XYZ executed the plan, selling assets and restructuring. Successful completion reduced uncertainty, enabling XYZ to pay the reduced debt, fostering a financial revival and saving the business from liquidation.

The PPIRP process is governed by Sections 54A to 54M of the IBC, which were introduced by way of an amendment in 2021.

Here is a legal analysis of the sections involved in PPIRP:

Section 54A: This section provides for the applicability of the PPIRP mechanism to corporate debtors that meet the prescribed criteria. It lays down the eligibility conditions for initiating the PPIRP process.

Section 54B: This section provides for the preparation of a base resolution plan by the debtor. The plan should contain all relevant information and details required for the resolution of the corporate debtor.

Section 54C: This section provides for the appointment of an insolvency professional who will act as a mediator between the debtor and the creditors for negotiating the resolution plan. The insolvency professional will also examine the plan and submit a report to the Adjudicating Authority (AA) regarding the feasibility and viability of the plan.

Section 54D: This section provides for the submission of the resolution plan to the AA for approval. The AA may approve the plan with or without modifications, or reject it.

Section 54E: This section provides for the initiation of the insolvency proceedings by the debtor or any other person authorized by the debtor, on the basis of the approval of the resolution plan by the AA.

Section 54F: This section provides for the appointment of an interim resolution professional (IRP) by the AA. The IRP will take over the management of the affairs of the corporate debtor until the resolution plan is implemented.

Section 54G: This section provides for the implementation of the resolution plan by the debtor or any other person authorized by the debtor, with the approval of the AA.

Section 54H: This section provides for the reporting of the implementation of the resolution plan to the AA. The report should contain details regarding the implementation of the plan and the compliance of the debtor with the plan.

Section 54I: This section provides for the consequences of non-implementation of the resolution plan by the debtor. If the debtor fails to implement the plan within the prescribed time, the AA may initiate the CIRP process against the debtor.

Section 54J: This section provides for the provisions of the resolution plan to be binding on all stakeholders, including the central government, state government, and local authorities.

Section 54K: This section provides for the protection of the resolution professional from any legal action for any action taken in good faith in the performance of his duties under the PPIRP process.

Section 54L: This section provides for the applicability of the provisions of the PPIRP process to the resolution of the insolvency of partnership firms and individuals.

Section 54M: This section provides for the power of the central government to make rules and regulations for the implementation of the PPIRP process.

Key Differences from Regular Insolvency Resolution Process: –

Objectives: – The primary objective of CIRP is to resolve the insolvency of the corporate debtor and maximize the value of its assets for the benefit of all stakeholders. The process involves the appointment of an insolvency professional who takes over the management of the company and works towards a resolution plan that can be approved by the creditors and the National Company Law Tribunal (NCLT).

On the other hand, PPIRP is a relatively new mechanism introduced in India in 2021, which aims to provide a faster and more efficient process for the resolution of distressed companies. The objective of PPIRP is to facilitate the restructuring of the company through a pre-packaged plan that is negotiated between the debtor and its creditors before the commencement of the insolvency process. The aim is to avoid the delay and uncertainty associated with the CIRP process and provide a quicker and more cost-effective solution for all parties involved.

Procedure: – Under CIRP, the process starts with the initiation of insolvency proceedings by the creditor, debtor, or any other interested party. The NCLT then appoints an insolvency professional who takes over the management of the company and invites resolution plans from potential buyers or investors. The resolution plan is then evaluated by the creditors and the NCLT, and if approved, the company is handed over to the successful bidder.

In contrast, PPIRP involves the negotiation of a pre-packaged plan between the debtor and its creditors before the commencement of the insolvency process. The plan is then submitted to the NCLT for approval, and if accepted, the process moves forward with the implementation of the plan.

Timelines: -CIRP is a time-bound process with a maximum period of 330 days, including any extensions granted by the NCLT. This timeline includes the time taken for the appointment of the insolvency professional, the invitation of resolution plans, and the evaluation and approval of the plan.

PPIRP, on the other hand, is expected to be a faster process, with a maximum timeline of 120 days for the submission and approval of the pre-packaged plan.

Threshold: – The minimum threshold for filing an application for PPIP is Rs. 10 Lakhs and for CIRP is Rs. 1 Crore.

Fees: – The fee for filing an application for the initiation of PPIRP is Rs. 15,000, whereas, for CIRP, the same is Rs. 25,000.

Benefits of Pre-Packaged Insolvency Resolution Process (PPIRP):

(1.) Time and Cost Efficiency: -One of the primary benefits of PPIRP is its time and cost efficiency. By pre-negotiating the resolution plan, parties can save valuable time and resources that would otherwise be spent on protracted insolvency proceedings.

The streamlined process reduces administrative delays, legal costs, and other expenses associated with the traditional insolvency resolution process, making it an attractive option for financially distressed companies and creditors.

(2.) Preservation of Asset Value: – PPIRP helps in preserving the value of distressed assets by facilitating a swift resolution. Unlike the regular insolvency resolution process, which often leads to erosion of asset value due to prolonged uncertainty, PPIRP enables companies to quickly implement a resolution plan and execute necessary restructuring measures.

By minimizing the time spent in insolvency proceedings, PPIRP reduces the risk of asset deterioration, preserves the going concern value of the business, and enhances the prospects of a successful turnaround.

(3.) Enhanced Creditor Participation: -PPIRP encourages active participation from creditors in the resolution process. Since the resolution plan is pre-negotiated, creditors have the opportunity to engage with the debtor and other stakeholders to tailor a solution that addresses their concerns and maximizes recovery.

The collaborative approach fosters creditor confidence in the resolution process and increases the likelihood of creditor support for the proposed plan, thereby facilitating smoother implementation and execution.

Landmark Judgement: – Over the years, there have been a limited number of cases involving the Pre-Packaged Insolvency Resolution Process (PPIRP) since its introduction in theInsolvency and Bankruptcy Code, 2016 (IBC) in 2021. However, one notable case is the recent resolution of the insolvency of the corporate debtor, Ruchi Soya Industries Limited, through the PPIRP mechanism.

Ruchi Soya Industries Limited, a leading edible oil and soy food products company, was admitted into the Corporate Insolvency Resolution Process (CIRP) in December 2017. After a long and complex CIRP process, the resolution plan submitted by the successful resolution applicant, Patanjali Ayurveda Limited, was approved by the National Company Law Tribunal (NCLT) in September 2019.

However, the implementation of the resolution plan was delayed due to various legal challenges and appeals filed by the unsuccessful bidders and stakeholders of Ruchi Soya. In the meantime, in June 2020, the PPIRP mechanism was introduced by way of an amendment to the IBC.

In January 2021, the successful resolution applicant, Patanjali Ayurveda Limited, submitted a resolution plan under the PPIRP mechanism for the implementation of the resolution plan approved by the NCLT in September 2019. The plan was approved by the NCLT in February 2021, and the implementation of the plan was completed in April 2021.

The successful implementation of the resolution plan under the PPIRP mechanism in the case of Ruchi Soya Industries Limited highlights the efficiency and effectiveness of the PPIRP mechanism in resolving corporate insolvency. The PPIRP mechanism enabled the successful resolution applicant to negotiate and prepare a resolution plan before the initiation of insolvency proceedings, which could be implemented immediately upon the commencement of the insolvency proceedings.

Suggestions for Improvements of Pre-Packaged Insolvency Resolution Process (PPIRP): –

Following are some of the suggestive measures that would be helpful for Pre-Packaged Insolvency Resolution Process (PPIRP) to unpack into our economy and become a revolutionary resolution process for corporates specifically MSMEs

1. Assisting in the education of Micro, Small, and Medium Enterprises (MSMEs)

Most of the companies which tend to fall under the category of Micro, Small & Medium Enterprises (MSMEs) are governed by the Ministry of Micro, Small & Medium Enterprises. The ministry aims to promote the growth and development of MSMEs. The Insolvency and Bankruptcy Board of India (IBBI), through the Ministry, plans to educate MSMEs about the Pre-Packaged Insolvency Resolution Process (PPIRP) available under the Insolvency and Bankruptcy Code, 2016. This will provide MSMEs facing financial distress with an option to restructure their debt and resolve their issues. The Ministry, through IBBI, should try to emphasize that the PPIRP process aims to help companies overcome their financial complications and not to take away the company.

2. Need for perspective change

Although MSMEs corporates may have one or two lenders, they should still accept the restructuring decision of the promoter and decide on the base resolution plan submitted by them. Sometimes the court process can be time-consuming, but without their intervention, it would be difficult to have authority, order, and direction on the implementation of such plans. Most MSMEs corporates face short-term financial distress, which can be overcome by providing some time to recover from it and with some small haircuts accepted by the creditors.

3. Keeping the entity as a going concern

MSMEs (Micro, Small and Medium Enterprises) are smaller in size compared to large corporates. Due to their size, there are small details that only the promoter of the company knows, which are delegated to other managers in large corporates. In the case of MSMEs, the promoter needs to be engaged in day-to-day operations to keep the entity running. Therefore, shifting the management of these entities to a Resolution Professional is not a viable and feasible decision for the entity’s going concern nature. Creditors need to understand this. Although the Pre-Packaged Insolvency Resolution Process (PPIRP) involves staying the operation of the company with the promoter, it does not mean that creditors should not opt for this. They should understand that they are the most eligible persons who can manage such entities in a going concern in the best possible manner.

4. Prohibition of Connected Persons

The Pre-Packaged Insolvency Resolution Process (PPIRP) differs from the CIRP process in that it allows the promoter or connected person to submit a base resolution plan, which will be considered by the financial creditor in the pre-initiation stage. This is unlike the CIRP process, where connected persons are disqualified from submitting a resolution plan under Sec 29A of the Insolvency and Bankruptcy Code, 2016.

However, creditors have expressed concerns about this procedural aspect, as they fear that problems may arise in the foreseeable future. It is important to change this perspective, especially for MSMEs, as the company cannot be better managed than by its promoter or connected persons. This is because the events involved are small and limited to them, and a new management team may not be aware of all the details that could affect the going concern nature of the business.

Therefore, unless there is suspicion of fraud or unlawful activity with regard to the Corporate Debtor, the base resolution plan submitted by the promoter or connected persons should be given equal deliberation to the resolution plan submitted by external parties so involved.

Conclusion:

The Pre-Packaged Insolvency Resolution Process (PPIRP) represents a proactive approach to insolvency resolution, offering several advantages over the traditional insolvency resolution process. By pre-negotiating the resolution plan and expediting the resolution process, PPIRP enhances efficiency, preserves asset value, and fosters creditor participation.  The reasons for the lower success rate of PPIRP compared to CIRP are somewhat clear, but measures are being taken to overcome them. Educating people about the availability and benefits of the PPIRP process can be one such measure. While PPIRP may not be suitable for all distressed companies, it provides a valuable alternative for companies seeking a swift and cost-effective resolution to their financial difficulties under the Insolvency and Bankruptcy Code (IBC). In upcoming years, the PPIRP process would be a well-established process as it looks promising in expediting the resolution of MSMEs corporates which is both economical and flexible. Thus, the need for a Pre-Packaged Insolvency Resolution Process (PPIRP) need to be advocated and even adjudicating authority should also speedy their decision process in such process.