Promulgated in 2021 as an amendment to the Insolvency and Bankruptcy Code (IBC) 2016, the PPIRP was designed to facilitate the resolution of stressed assets of MSMEs. Unlike the CIRP, the PPIRP model helped reduce the cost of litigation. Comparatively, it has been better at preserving business value, recovering creditors and protecting jobs. The legal framework empowered it as a less disruptive alternative to bankruptcy proceedings. Apart from its promising aspects, a critical analysis is important at a juncture where the growth of MSMEs is critical to the economy and many legal experts have reported the benefits of PPIRP.

Possibility of Pre-Pack Bankruptcy for MSMEs:

During the pandemic several countries announced programs aimed at restructuring and saving MSMEs. For example, Singapore and many countries in the Middle East and Africa introduced a simplified system and so did leading Western economies. Since implementation, India’s PPIRP has met with moderate success with the 2024 IBBI Annual Report declaring the PPIRP a success.

At first glance one may perceive a PPIRP as an out-of-court arrangement initiated by a corporate creditor. But, the applications are examined by NCLT. A streamlined process enables faster resolutions by allowing a company and its creditors to negotiate a prepackaged plan before entering bankruptcy formalities. This process is also more cost-effective than full bankruptcy, making it a practical choice for small businesses with limited resources.

Singapore’s simplified bankruptcy program shares 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, in line with India’s emphasis on reducing the burden on MSMEs. is However, Singapore’s regime includes more streamlined judicial involvement, which reduces administrative burdens. Both systems are built around the idea that a quick and easy process helps companies in trouble continue to operate while managing their debt effectively, showing how India has successful models abroad. can be affected by

Challenges and limitations

Recent reports have highlighted the success of the PPIRP, resulting in legal experts expressing potential enforcement in corporate cases. However, there may be some unanswered questions. Some concerns like awareness among MSMEs, ethical and transparency aspects of PPIRP require a critical analysis.

Ensuring transparency and fairness in the prepack process can sometimes be subject to abuse. For example, because a company and its creditors negotiate terms before entering formal bankruptcy proceedings, there is a risk that certain creditors or stakeholders may be left out. or lose it, especially if they have no bargaining power. Unlike a CIRP where a resolution professional has the disadvantage of handling an undisclosed business, administrative work continues uninterrupted in the PPIRP model. This also raises the moral question of whether the insolvent management should be allowed to continue the business.

It is also important to note the operational lenders’ challenges with the PPIRP process. Challenges that an operational lender faces range from unsecured debt, limited influence over collections, low collections, and the possibility of legal protection. Creditors are legally empowered in such cases in jurisdictions such as the United States and the United Kingdom.

Among the salient features – two compelling factors give the PPIRP model an edge over the CIRP model. Less correspondence with NCLT and a period of 120 days compared to CIRP’s standard 180 days means faster resolution time. Also, less burden on NCLT and absence of a Resolution Professional (RP), results in faster resolution unlike in case of CIRP. In addition, the structure and procedures of the PPIRP have helped to check misuse of legal provisions.

Ethics and transparency are important considerations. Dealing with potential abuse by dominant stakeholders can build trust. While the PPIRP offers a promising alternative to traditional bankruptcy proceedings by emphasizing speed and cost-effectiveness, its effectiveness will depend on balancing the interests of creditors with adequate protections for all stakeholders. PPIRP is a ray of hope for MSMEs, but if we can win the trust of lenders like banks, it could be much more.

Author: Akshat Khetan is a corporate and legal advisor (Twitter @akshat_khetan). Scenes are personal.