Pre-Pack Insolvency Resolution: A Solution for MSME Distress? - Examining India's Pre-Pack Schemes And Their Role In Resolving MSME Insolvency
63 million MSMEs employ nearly 115 million individuals, contributing to over 30% of India's GDP. MSMEs in India are also renowned for producing over 6,000 products, a good part of which earns precious forex. When the pandemic struck, there was a need to safeguard these MSMEs from adverse financial conditions. Enter pre-pack insolvency resolution process (PPIRP). The legal-process balanced the interests of stakeholders by ensuring that the company continued its operations and the overall business value.
Announced as an amendment in 2021 to the Insolvency and Bankruptcy Code (IBC) 2016, PPIRP was designed to simplify resolution of stressed assets of MSMEs. Unlike CIRP, the PPIRP model helped reduce the cost of litigation. Comparatively, it has been better in preserving business value, recovery for creditors, and in safeguarding of jobs. The legal framework empowered it as a less disruptive alternative to insolvency proceedings. Beyond its promising aspects, a critical analysis is crucial at a juncture where MSME growth is crucial to the economy and several legal experts have reported benefits of PPIRP.
Potential of Pre-Pack Insolvency for MSMEs:
During the pandemic, several countries announced programs aimed at restructuring and saving MSMEs. For instance, Singapore and many countries in the Middle-East and Africa introduced a simplified procedure and so did leading Western economies. Since implementation, India's PPIRP has had moderate success with the IBBI annual report for 2024 calling PPIRP a success.
At first glance one may perceive PPIRP as an out-of-court arrangement initiated by a corporate debtor. But, applications are vetted by the NCLT. A streamlined process enables quicker resolutions by allowing a company and its creditors to negotiate a pre-packaged plan before entering formal insolvency proceedings. The process is also more cost-effective than full-fledged insolvency, making it a practical choice for small businesses with limited resources.
Singapore's Simplified Insolvency Programme reveals similar goals but some structural differences. Singapore's program, introduced in 2020, is designed to offer quick, cost-effective debt restructuring for micro and small companies, aligning with India's emphasis on reducing the burden on MSMEs. However, Singapore's regime includes more streamlined court involvement, which reduces administrative requirements. Both systems are built around the idea that a swift and simplified process helps companies in distress continue operating while managing their debt effectively, showing how India can draw inspiration from successful models abroad.
CHALLENGES & LIMITATIONS
Recent reports have highlighted the success of PPIRP which has resulted in legal experts expressing a possible implementation in corporate cases. However, there may be some unanswered questions. Some concerns such as awareness among MSMEs, ethical and transparency aspects of PPIRP need a critical analysis.
Ensuring transparency and fairness within the pre-pack process can sometimes be prone to misuse. For instance, since a company and its creditors negotiate the terms before entering formal insolvency proceedings, there's a risk that certain creditors or stakeholders may be left out or disadvantaged, especially if they lack bargaining power. Unlike a CIRP where a resolution professional has the disadvantage of handling an unexplored business, the management function continues without disruption in the PPIRP model. This also raises the ethical question of should a defaulting management be allowed to continue running the business?
It is also important to note the challenges of operational creditors with the PPIRP process. Challenges that an operational creditor faces with such a process could range from unsecured debt, limited influence on recoveries, low recoveries, and the possibility of statutory protection. Creditors are legally empowered in such cases in jurisdictions such as US and UK.
Among the salient features - two compelling factors give the PPIRP model an edge over the CIRP model. Less correspondence with the NCLT and a 120-day duration over the CIRP's standard 180 days means a faster resolution time. Also, a lesser burden on the NCLT and absence of a Resolution Professional (RP) unlike in the case of a CIRP results in faster resolution. Besides, the structure and the methodology of PPIRP has helped keep a check on misuse of the legal provisions.
Ethics and transparency are important considerations. Tackling potential misuse by dominant stakeholders could build trust. While PPIRP offers a promising alternative to traditional insolvency proceedings by emphasizing speed and cost-effectiveness, its effectiveness will depend on balancing creditor interests with adequate protections for all stakeholders. PPIRP is a ray of hope to MSMEs, but it can be much more if we can win the confidence of creditors such as banks.
Author: Akshat Khetan is a corporate and legal advisor (Twitter @akshat_khetan). Views are personal.