Pre-packaged Insolvency Resolution Process (PPIRP)

The Ministry of Corporate Affairs has notified the provisions related to Pre-pack Insolvency Process for Micro, Small and Medium Enterprises (MSMEs) registered under Micro, Small and Medium Enterprises Development Act, 2006. PPIRP is aimed at helping a Corporate Debtor (CD) restructure its debts, so that it may start afresh. It seems this process is rolled out for MSMEs since they have meager investments in plant and machinery and find it particularly difficult to find investors. The rules and regulations which shall govern the provisions have also been notified. The minimum default of ten lakh rupees as the minimum amount of default has been notified for the purpose of PPIRP of Corporate Debtor. The said provisions related to PPIRP have been included in chapter IIIA of the Insolvency and Bankruptcy Code, 2016 (IBC) especially for MSMEs.

What is PPIRP?

PPIRP is a model of restructuring that allow creditors and debtors to work out an informal plan and subsequently submit it for approval. It is an informal arrangement for the resolution of the debt of a distressed company through an agreement between creditors and debtor, without initiation of insolvency proceedings and alleviating CD of the stress attached. This system of insolvency resolution is already in place in UK and Europe.

Pre-requisites for initiation of PPIRP

The pre-requisites for initiation of PPIRP are as follows:

i. CD has committed a default of at least ₹10 lakh (Rupees ten lakh only);

ii. CD is eligible to submit a resolution plan under IBC ;

iii. CD has not undergone a PPIRP during the 3 (three) years preceding the initiation date;

iv. CD has not completed a CIRP during the 3 (three) years preceding the initiation date;

v. CD is not undergoing a CIRP; and

vi. CD is not required to be liquidated by an order under IBC.

Essential Features of a PPIRP

The benefits of the PPIRP are as follows:

i. Time bound process- the provisions clearly stipulate that the entire PPIRP needs to be completed within a time period of one hundred twenty (120) days from the date of initiation of the commencement date. In addition, the insolvency professional shall be required to submit resolution plan as approved by the Committee of Creditors (CoC) within a period of ninety days from the insolvency commencement date and if no plan is approved by the CoC in the designated time frame, then insolvency professional shall be required to file for termination of PPIRP with the Adjudicating Authority.

ii. Corporate Debtor in control- as opposed to the CIRP proceedings where the appointed resolution professional is in control of the CD, in a PPIRP proceeding the CD management retains the control of the affairs of the CD.

iii. Binding nature of the resolution plan- the resolution plan that is finalized in the proceedings has a binding value, unlike mere verbal negotiations between CD and its debtors.

iv. Promoter have a chance to salvage the CD if they come with clean hands.

v. Confidentiality- if the information of a CD undergoing insolvency gets leaked in the market, the value of assets of the plummets, irrespective of the economic value of the assets. In pre packaged framework, the plan of revival of the CD is drawn up in a confidential manner, this confidentiality preserves the reputation along with the going concern value of the company.

vi. Cooling-off period- the process provides for a period of three (3) years between two PPIRP.

vii. The Adjudicating Authority may order liquidation of CD in case the PPIRP proceedings are terminated.

viii. Swiss Challenge-The PPIRP mechanism allows for a swiss challenge for a given resolution plan that mentions less than full recovery of dues for creditors. Also, if the creditors are not satisfied with the resolution plans put forth by the promoter of CD, they can seek resolution plans from a third party. Under this mechanism, any third party would be able to submit a resolution plan for a CD and CD can either go forward with the improved resolution plan or forego the investment.

ix. During PPIRP, the CoC has the power to vest the management of the CD with the insolvency professional. The CoC also has the power to initiate CIRP proceedings against the CD, at any time, after the PIRP commencement date but before the approval of resolution plan.

Primary apprehensions related to PPIRP

i. Lack of transparency- The nature of PPIRP leads to a lack of transparency, where often unsecured creditors feel disenfranchised by the secrecy.

ii. Future of the CD after PPIRP- the insolvency professional appointed for the PPIRP has no legal requirement to look at the future viability of the new business emerging from a PPIRP, and the practitioner’s legal responsibility is to the creditors of the old business.

Details of Resolution Plan that may be passed under PPIRP

The regulations related to PPIRP provide that a Resolution Plan under PPIRP may provide for the following measures for the maximization of value of assets of a CD, as may be applicable:

i. transfer of all or part of the assets of the CD to one or more persons;

ii. sale of all or part of the assets whether subject to any security interest or not;

iii. restructuring of the CD, by way of merger, amalgamation and demerger;

iv. the substantial acquisition of shares of the CD;

v. cancellation or delisting of any shares of the CD, if applicable;

vi. satisfaction or modification of any security interest;

vii. curing or waiving of any breach of the terms of any debt due from the CD;

viii. reduction in the amount payable to the creditors;

ix. extension of a maturity date or a change in interest rate or other terms of a debt due from the CD;

x. amendment of the constitutional documents of the CD;

xi. issuance of securities of the CD, for cash, property, securities, or in exchange for claims or interests, or other appropriate purpose;

xii. change in portfolio of goods or services produced or rendered by the CD;

xiii. change in technology used by the CD; and

xiv. obtaining necessary approvals from the Central and State Governments and other authorities

Since, MSMEs have an exiguous investment in plant and machinery, this process of PPIRP will be a blessing for both creditors and the management of MSMEs, as it will provide them with an opportunity to restructure their liabilities and start with a clean slate. The safeguards included in PPIRP are likely to reduce the chances of misuse of the process. Therefore, it seems to be a well-thought-out initiative of the MCA and based upon a method which has received success abroad. However, its lack of transparency may be a cause for concern for Indian Companies.