One of the stated objectives of the Insolvency and Bankruptcy Code (IBC) is to revive sick companies. However, it was gradually seen to be more harmful than beneficial to MSMEs. MSME sector in India is unique; it distinguishes itself from any other form of the industrial ecosystem in the world, with its peculiar strengths and weaknesses. One of the major weaknesses faced by them is the non-availability of timely finances. IBC code, though well-formulated, fell on the MSME sector heavily. It became a tool for creditors to arm-twist MSMEs for recovery of money however meagre may the sum be. The very purpose of the code of reviving the companies came into jeopardy.
To prevent this, the government promptly brought in an amendment to raise the limits from Rs 1 lakh to Rs 1 crore. However, this swung the pendulum to another extreme, as the increase in limit virtually excluded a significant size of MSME creditors out of the IBC regime. Though well-intentioned, the amendment relegated the MSME creditors to be bystanders to the CIRP and watch the benefits under IBC being washed away.
One of the enduring strengths of this regime is its ear to the ground, continuous monitoring of its policies, and making appropriate changes whenever required. As expected, the government sprung to the rescue of MSMEs, by bringing in an amendment in the form of Pre-Packaged Insolvency Resolution Package (PPIRP) through an ordinance dated 4 April 2021. The ordnance has inserted Chapter III-A in the IBC, 2016 to provide for a pre-packaged insolvency resolution process. This amendment enables the corporate debtors even below Rs 1 crore to move an application under the IBC.
PPIRP is a consensual form of restructuring, wherein the initiative lies with the corporate debtor. The debtor can now prepare a resolution plan and submit it before the creditors for their approval. Once an agreement is reached between the creditors and the debtor, the same is placed before the Adjudicating Authority (AA) for approval. Approval by AA confers the agreement with the force of law. All the while, the management remains in the hands of a corporate debtor, there is no stoppage or disruption of business.
The amendment denotes a shift in Insolvency Resolution Regime. Before this, only the creditor(s) could make the move or file applications, while the debtor could only respond to it. Now, with the insertion of PPIPRP, even the debtor can initiate the resolution proceedings. This is a shift from creditors-in-possession to debtors-in-possession and control of the business, whereas the creditors get only limited control on business.
BENEFITS OF PPIRP
1. Better chances of revival of business: Since applications are filed by debtors, they would be filed at much earlier stages. Thus, increasing the chances of revival of business. Revival of one business has a domino effect on many others. The more the businesses revive, the lesser will be the economic distress and the healthier the business environment will be.
2. Better realisation of assets: Early commencement of resolution proceedings, retention of control of the business in the hands of the corporate debtor, and consensual resolution method lead to optimum utilisation and better realisation of assets of the corporate debtor.
3. Reduction in the burden on AA: The agreement arrived at between the creditors and the corporate debtor is placed before the AA for approval. Since the AA is required to examine only the legality of the agreement before approving, the approval process requires less time and work.
4. Legal Validity and Binding Nature: It’s relevant to note that, about 14,150 applications filed with NCLT for initiation of CIRP were withdrawn at the pre-admission stage, indicating a consensual resolution agreement reached between parties. However, there is no legal force to these resolutions. With the introduction of PPIRP, such agreements are required to be approved by the AA which makes them legally binding.
5. Cost Effective: PPIRP resolution process is less time consuming, the costs linked is also less. Management of the business remains with the promoters of corporate debtor (doesn’t shift to a resolution professional), thus the costs of disruption of business during the transition phase are avoided. Further, as the major part of the process is off the court, there is a reduction of related expenses for both creditors and the debtor.
PPIRP is no less than a game-changer. It’s a meaningful step towards increasing the ease and chances of the revival of business. This will not only provide succour to the 6.3 crore MSMEs of India but also safeguard the 11 crore jobs created by this sector. It’s a self-healing model available to the small businesses, wherein they can plan the most suited restructuring proposal, put it before lenders and get it approved. It’s a shot in the arm for MSMEs when the resolution plan attains binding legal force on approval by the AA.
Sreenivas Bidari is a Commissioner of Income Tax (Appeals) & C.S. Ranjit Kejriwalis a FCS and Registered Valuer (SFA).