ALL YOU NEED TO KNOW ABOUT PRE-PACKAGED INSOLVENCY FOR MSMEs.
Updated: Sep 4, 2022
After several deliberations on introducing the Pre-Pack Arrangement under the ambit of the Insolvency & Bankruptcy Code, On April 4, 2021, the government introduced the ordinance by promulgating the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021.
Who is Eligible?
Micro, Small and Medium Enterprises as defined under Section 7(1) of the Micro, Small and Medium Enterprises Development Act, 2006 are eligible to avail the pre-packaged insolvency scheme, subject to certain conditions. For a minimum default threshold of Rs. 10 lakhs, the PPIRP process can be initiated by the MSME’s. However, to be eligible, some conditions must be fulfilled
CD should not have undergone PPIRP in the last 3 years
CD must not be undergoing CIRP at present
No liquidation order has been passed against the CD
Eligible to submit resolution plan under Section 29A of the I&B Code
How to apply?
Form 1 on the rules notes the application form for initiating PPIRP. This form must be submitted along with the necessary documents such as RP’s report, written consent of the IP proposed to be appointed as authorized representative for a class creditors group, declaration concerning avoidance transactions, fraudulent or wrongful trading, information on books of accounts of the CD.
What is the Time Limit to apply?
Time limit of completion is 120 days, unlike 180 days under CIRP. The RP has to submit the COC-approved resolution plan to the NCLT within 90 days from PPIRP commencement. The NCLT has 30 days to approve the plan. PPIRP can be terminated by the NCLT at any time before the approval of the resolution plan by COC, provided the COC approves such withdrawal by 66% vote.
How is it different from CIRP?
Pre-packaged Insolvency resolution process is at present applicable only to MSME’s. It is a resolution process where the Corporate debtor (MSME) can formulate a resolution plan with their creditors while holding control over the management and operation of the Corporate Debtor.
Unlike CIRP where the Creditor-in-charge model is adopted and the resolution Professional takes control over the assets/management/operation of the Corporate Debtor.
PPIRP can be initiated only by the debtor, unlike CIRP where debtor or creditor can initiate the process.
The management of the CD remains with the Board of Directors, subject to the RP monitoring this and consent from the COC for matters listed in Section 28.
Further, NCLT has a limited role in the PPIRP and must be completed within 120 days (at most) unlike as 330 for CIRP.
Is a Resolution Professional Appointed?
Prior to filing the application, the CD must nominate an Insolvency resolution profession and this nomination must be approved by at least 66% of unrelated financial creditors who aren’t related parties to the CD. Prior to filing application, the role of RP is to prepare a note on the CD about complying with eligibility criteria and other information sought by IBBI.
What is the procedure of resolution?
The CD will prepare a ‘Base Resolution Plan’ in compliance with Section 30 of the I&B Code. After admission of the PPIRP application, the CD will present this for approval from 66% of the COC. This process will be done within 2 days from formation of the COC. If not approved by COC for any reason, the Base resolution plan will be rejected and the RP will invite for prospective resolution applicants to submit resolution plans.
How does it help a MSME?
Although informal in approach, the PPIRP is cost- effective, faster and vests control with the BOD, unlike the CIRP process. Hard-hit by the pandemic, MSME’s suffered large backlogs and debts. Despite extending moratorium periods and bringing regulatory relaxations, the restructuring of an MSME by the PPIRP method alleviates most financial burdens.