The role of Micro, Small and Medium Enterprises (MSMEs) in driving employment and Gross Domestic Product has led to the introduction of the pre-pack insolvency resolution process (PPIRP). The PPIRP aims to provide a swift, cost-effective, and value-maximizing alternative insolvency resolution process tailored for the MSME sector. Its focus is on preserving jobs and ensuring minimal disruption to the continuity of businesses.

Debtor-in-Possession and Creditor-in-Control Model

At the heart of the PPIRP lies the ‘Debtor-in-possession and creditor-in-control’ model, a unique approach that combines the benefits and structure of formal insolvency proceedings. This model allows promoters to retain control of the Corporate Debtor (CD), facilitating the continuation of business operations with minimal disruptions. It provides a second chance for honest debtors to retain their enterprises through arrangements with lenders.

Initiation of PPIRP and Eligibility Criteria

The initiation of pre-pack insolvency requires approval from financial creditors representing at least sixty-six per cent of the financial debt due to them. Eligibility criteria for the Corporate Debtor (CD) include being classified as an MSME, defaulting within a specified amount range, and meeting various regulatory conditions. The CD must not have undergone PPIRP or (CIRP) in the preceding three years, should not be undergoing CIRP. And must be eligible to submit a Resolution Plan under section 29A of the Insolvency and Bankruptcy Code (IBC).

Approval of Financial Creditors (FCs)

To gain approval from financial creditors (FCs), the CD convenes a meeting, seeking consent for various crucial aspects such as the appointment of Insolvency Professional (IPs), terms of appointment, and filing the application for initiating PPIRP. Without the necessary approvals, the adjudicating authority will not admit the company into PPIRP. Financial services firms like Ancoraa Resolution have a big network of Insolvency professionals that equip individuals with the tools necessary for success in matters of insolvency, debt resolution, and liquidation.

Duties of Insolvency Professional (IP)

Before the commencement of PPIRP, the proposed IP is tasked with preparing a report confirming the CD’s eligibility, filing required reports with the Insolvency and Bankruptcy Board of India (IBBI). Identifying creditor classes, obtaining consents from IPs to act as authorized representatives, and more.

How Does PPIRP Work?

The Adjudicating Authority (AA) reviews the PPIRP application within 14 days, declaring a moratorium and appointing an RP on the pre-pack insolvency commencement date (PPICD). The PPIRP must be completed within 120 days, with the RP submitting the approved resolution plan within 90 days from the PPICD. If no resolution plan is approved, the RP files an application for termination.

Tasks that Corporate Debtor (CD) and Resolution Professional (RP) Undertake

Post-commencement of PPIRP, the CD needs to submit detailed information to RP, including a list of claims and guarantees. The RP, in turn, undertakes various responsibilities such as making a public announcement, maintaining claim lists, and preparing the Information.

Base Resolution Plan (BRP) and Swiss Challenge

The CoC evaluates the BRP, either approving it or initiating a Swiss Challenge if it does not meet certain criteria. The Swiss Challenge invites prospective resolution applicants (PRAs) to submit plans, fostering competition. The selected plan competes with the BRP, and the CoC makes the final decision based on evaluation criteria.

Monthly Reporting and Order of Priority

The CD collaborates with the RP to prepare monthly reports for CoC members, highlighting legal proceedings, key contracts, and other relevant matters. The order of priority depends on whether the PPIRP application is filed before or after a CIRP application.

Operational Creditors’ Benefit

The power dynamics in PPIRP shift to a debtor-in-control model. Section 54K of the IBC emphasizes that the CoC may approve the base plan. If it does not impair dues of operational creditors (OCs). The PPIRP ensures equal treatment for OCs and financial creditors (FCs). Offering an element of competition through a Swiss Challenge to maximize plan value.

Conclusion

Pre-Pack Insolvency Resolution Process stands as a crucial tool for the revival of MSMEs, offering a balanced approach that preserves jobs, ensures business continuity, and provides an efficient resolution timeline. As the debtor-in-control model becomes prominent, PPIRP addresses the unique challenges faced by MSMEs. Making it a valuable alternative to the traditional insolvency processes. The streamlined procedures, emphasis on creditor rights, and shorter resolution timeline contribute to adaptability and effectiveness of the PPIRP in the ever-evolving landscape of resolution.