Pre-packaged Insolvency Resolution Process (PPIRP)

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Context

• The Pre-packaged Insolvency Resolution Process (PPIRP) has achieved notable success in the full settlement of operational creditors' claims in five cases.
• They are - Amrit India, Sudal Industries, Shri Rajasthan Syntex, Enn Tee International and GCCL Infrastructure and Projects.
• These settlements demonstrate the efficiency and effectiveness of the PPIRP in resolving debts while ensuring fair treatment of operational creditors.

Introduction and Legislation

• Enactment of IBC: The Insolvency and Bankruptcy Code (IBC) was enacted by the Indian government in August 2021 to provide a structured and time-bound process for resolving insolvency and bankruptcy.

ALL ABOUT IBC: https://www.iasgyan.in/daily-current-affairs/insolvency-and-bankruptcy-code-ibc-2016

• Purpose of PPIRP: The PPIRP was introduced specifically for micro, small, and medium enterprises (MSMEs) to offer a quicker, more efficient insolvency resolution process.

READ ALL ABOUT Pre-packaged Insolvency Resolution Process (PPIRP):https://www.iasgyan.in/daily-current-affairs/pre-pack-insolvency-resolution-option-for-msmes

Details

What is Insolvency?

• Insolvency is a state in which a business or an individual is unable to pay debts on time.
• It often leads to a bankruptcy filing, marking a legal declaration of one's inability to repay outstanding debts.

Insolvency and Bankruptcy Code, 2016

• Introduction: Passed in 2016, the Insolvency and Bankruptcy Code (IBC) governs insolvency and bankruptcy proceedings for companies, partnership firms, and individuals.
• Legal Unification: The IBC subsumed several laws, including provisions from the Companies Act 2013, to provide a cohesive legal framework for dealing with insolvency.
• Significance: The insolvency process under the IBC was a significant reform aimed at resolving the financial distress of companies. While it still faces challenges, the IBC has managed to address over 2,000 cases through resolution or liquidation.

Pre-packaged Insolvency Resolution Process (PPIRP)

Importance for MSMEs

• Economic Backbone: Micro, small, and medium enterprises (MSMEs) are vital to the Indian economy, generating millions of jobs. Their health is crucial for sustained economic growth.
• Covid-19 Response: In response to the financial stress caused by the Covid-19 pandemic, the pre-packaged insolvency resolution process was introduced in April 2021 to aid distressed MSMEs. This initiative recognized the unique nature and needs of small and mid-sized companies.

Features of PPIRP

• Speedy Resolution: The pre-packaged insolvency process offers an alternative and quicker resolution mechanism for MSMEs in financial distress.
• Scope: The PPIRP aims for quicker, cost-effective, and value-maximizing resolutions with minimal disruption to business continuity.
• Timeline: The entire resolution process must be completed within 120 days from the date of initiation.
• Eligibility: The process applies to defaults ranging from Rs 10 lakh to Rs 1 crore. For defaults above this range, the corporate insolvency resolution process under the IBC is initiated.

Informal Understanding and Process

• Informal Agreement: Unlike the corporate insolvency process, the PPIRP allows for an informal understanding between creditors and debtors. This informal agreement serves as a preliminary step before formal insolvency initiation.
• Approval: Once 66% of creditors approve the informal proposal, the pre-packaged insolvency resolution process officially begins.

KEY DIFFERENCES: CORPORATE INSOLVENCY RESOLUTION PROCESS (CIRP) AND PRE-PACKAGED INSOLVENCY PROCESS (PPIRP) Corporate Insolvency Resolution Process (CIRP) and Pre-Packaged Insolvency Process (PPIRP) are two important mechanisms available under the Indian Insolvency and Bankruptcy Code, 2016 (IBC) for the resolution of distressed companies. Key Comparison 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. Legal Provisions: CIRP is governed by Chapter II of the IBC, which outlines the procedure for the initiation of insolvency proceedings, the appointment of the insolvency professional, and the evaluation and approval of the resolution plan. Section 29A of the IBC imposes certain eligibility criteria for bidders, such as the requirement that they should not be willful defaulters or have a past history of fraud. 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. S.No. Criteria CIRP Process PPIRP Process 1 Eligibility All companies and LLP Companies classified as MSME 2 Minimum amount of Default 1 Crore Rupees 10 Lakhs Rupees 3 Application for Initiation Financial Creditor, Operational Creditor and Corporate Debtor himself Corporate Debtor, authorized person of CD, Person in control of financial affairs of the CD 4 Timeline 180 Days + 90 Days + 60 Days 120 Days (No Extension) 5 Interim Resolution Professional (IRP) IRP will get appointed on the Insolvency Commencement Date (ICD) No Such Concept under this Process 6 Resolution Professional RP will get appointed on the 1st COC meeting held on 30th day of ICD RP will get appointed on the Pre-Packaged Insolvency Commencement Date (PICD) 7 Base Resolution Plan (Sec 5(2A)) No Such Concept under this Process It will be submitted by the Corporate Debtor to financial creditors before PICD 8 Moratorium & Public Announcement Applicable U/s 14 & 15 of IBC Applicable U/s 54E of IBC 9 Constitution of Committee of Creditors (COC) 23rd Day from the Insolvency Commencement Date (ICD) 7th Day from the Pre-Packaged Insolvency Commencement Date (PICD) 10 First Meeting of Committee of Creditors To be held within 7 days of Constitution of COC To be held within 7 days of Constitution of COC 11 Preliminary Information Memorandum (Sec 5(23A)) No Such Concept under this Process It will be submitted by Corporate Debtor within two days of PICD to RP 12 Management of the Corporate Debtor Vested with the IRP on ICD and subsequently transmitted to RP (Sec 17) Vested with the old management and RP shall monitor it (Sec 54F(2)(d)) 13 Initiation of CIRP (Sec 54O) Not Applicable COC at any time may decide upon for initiation of CIRP with voting not less than 66% 14 Resolution Plan Equal Opportunity to All First Opportunity to Promoters 15 Termination Results in Liquidation Only in case of 54J order – Liquidation Other case – Management continues CD

Concept of Pre-packaged Insolvency

• Pre-negotiation: The pre-packaged insolvency approach involves the debtor and creditors negotiating and agreeing on a resolution plan before the formal initiation of the insolvency process.
• NCLT Approval: Once the resolution plan is agreed upon, it is submitted to the National Company Law Tribunal (NCLT) for approval. This step is crucial as it provides legal sanction to the agreed plan.
• Efficiency: This method is similar to an out-of-court settlement and is designed to reduce the time taken for resolution, thereby minimizing business disruptions compared to the traditional corporate insolvency resolution process (CIRP).

Voluntary Initiation and Process

• Voluntary Initiation: The pre-packaged insolvency process is initiated voluntarily by the debtor, allowing businesses to proactively address insolvency issues.
• Pre-filing Negotiation: The debtor and creditors work on a draft resolution plan before formally initiating the insolvency process. This involves negotiating terms that are acceptable to both parties.
• Creditor Approval: The resolution plan must be approved by the required majority of creditors. This ensures that the plan has broad support and is likely to be effective in resolving the insolvency.
• NCLT Submission: Once finalized, the plan is submitted to the NCLT for formal approval. This step legalizes the agreed-upon resolution and provides a clear path forward for the business.
• Time Efficiency: The pre-packaged approach significantly reduces the time taken for resolution compared to the corporate insolvency resolution process, which can be lengthy and disruptive. By resolving issues pre-emptively, businesses can continue operating with minimal interruptions.

PRACTICE QUESTION Q. What do you understand by the Pre-packaged Insolvency Resolution Process (PPIRP)? Discuss its significance for Micro, Small, and Medium Enterprises (MSMEs) in India. How does PPIRP differ from the traditional Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC), 2016?

SOURCE: ECONOMIC TIMES