The central government has recently announced an ordinance allowing pre-pack as an insolvency resolution mechanism for the micro, small and medium enterprises (MSMEs), available to those enterprises which default up to 1 crore Insolvency and Bankruptcy Code, 2016. The move comes soon after the end of the one-year suspension of insolvency initiation imposed by the central government in light of the Covid-19 pandemic. Soon after the Ordinance was published, the government announced that the minimum amount of default for which PPIRP can be commenced for corporate MSMEs will be 10 Lakh rupees.

A pre-pack is the resolution of the distressed company's debt through an agreement between secured creditors and investors instead of a public bidding process. This legislation was enacted to offer corporate entities designated as micro, small, and medium businesses (MSMEs) an “efficient alternative insolvency resolution process.� Its goal is to create a cost-effective, quick, and value-maximizing system for resolving insolvency with the least amount of disturbance to business activities as possible (See here).

Over the last decade, this system of insolvency procedures has grown in popularity as a means of resolving insolvency in the United Kingdom and Europe. Under this system, the financial creditors will agree to the potential investor's terms and seek approval of the resolution plan from the National Company Law Tribunal (NCLT).

The key motivation behind introducing a pre-pack mechanism is to provide MSMs with an opportunity to restructure their liabilities and start with a clean slate while providing adequate protections so that the system is not misused by the firms to avoid making payments to the creditors. The Central Government and the Insolvency and Bankruptcy Board of India (IBBI) have also issued notifications, rules, and regulations to make the pre-pack procedure more operational.

The PPIRP mechanism, which would serve as a hybrid framework integrating both formal and informal procedures inside the core mechanism of the Insolvency and Bankruptcy Code, 2016 has been established to alleviate the limitations of the Corporate Insolvency Resolution Process (CIRP) in the case of simpler entities like Micro, Small and Medium Enterprises.

Pre-Packaged Insolvency Resolution Process (PIRP)
Conditions for initiation of PIRP proceedings:
An application can be made for the initiation of PPIRP in respect of the corporate debtor who under section 7(1) of the Micro, Small and Medium Enterprises Development Act, 2006, who had made default of a minimum of 10,00,000 INR subject to the fulfilment of the following conditions:

1. In the previous 3 years, the Corporate Debtor should not have undergone a Pre-packaged Insolvency Resolution Process (PPIRP) or Corporate Insolvency Resolution Process (CIRP).
2. The Corporate Debtor should not be undertaking CIRP during that time, and no pending liquidation order has been issued against the Corporate Debtor under section 33
3. The Corporate Debtor should be qualified to submit a Resolution Plan under Section 29A of the Insolvency and Bankruptcy Code.
4. The selection of the Resolution Professional and the plan must be approved by 66 per cent of unrelated financial creditors.
5. Section 54A(2) requires partners or directors of a corporate debtor to make a declaration (f).
6. A special resolution has been passed by the members of the corporate debtor approving the initiation of PPIRP.

Process for admission of application by NCLT for the commencement of PPIRP

1. The application will be submitted to the NCLT under section 54C of the Insolvency and Bankruptcy Code, 2016. The tribunal will either admit or reject the application within 14 days of its submission. The PPIRP shall be commenced from the date of admission.
2. A resolution professional (RP) shall be appointed, whose name will be proposed in the application. In case of any pending disciplinary proceedings against the proposed Resolution Professional, the Insolvency and Bankruptcy Board of India (IBBI) shall recommend the same.
3. The resolution professional shall make the public announcement within the next 2 days from the commencement of the process.
4. The moratorium shall be declared from the date of initiation of PPRIP.
5. One of the most important duties of RP is to form a Committee of Creditors (COC). His duties also include the formation and maintenance of the list of claims and prepare an information memorandum.
6. Section 54D of the code states that the PPIRP shall be completed within 120 days from the admission of the application by the NCLT. Within 90 days of the application's acceptance, the RP must submit to the NCLT a resolution plan authorized by the committee of creditors. If no resolution plan is authorized by the committee of creditors within the above-mentioned time limit, the RP must apply with the NCLT to terminate the process on the day after the time limit has expired.

Process of submission, negotiation and approval of resolution plans to be followed in the insolvency resolution process

1. The corporate debtor shall prepare a Base Resolution Plan and submit it to the financial creditors maintaining all the requirements of section 54K. The base resolution plan will only be approved if it is passed by a majority of 66 % votes.
   
2. The following documents shall be submitted to the creditors by the corporate debtor:
   • Base Resolution Plan
   • Declaration by the majority of directors
   • Special resolution passed by the members
   • Other documents as may be specified by section 54C
     
     
3. An intention to initiate PIRP shall be given to all the creditors by the corporate debtor and they shall be requested to attend all the forthcoming meetings concerning the PIRP.
   
   
4. Upon submission, the committee of creditors may provide an opportunity to the corporate debtor to revise the base resolution plan. The committee of creditors may approve the Base Resolution Plan for submission to the NCLT if it does not impair any claims owed by the corporate debtor to the operational creditors.
    
5. If the committee of creditors rejects the Base Resolution Plan, then the resolution professional will invite prospective plans that fulfil the resolution plan's criteria made by the resolution professional in consultation with the committee. The Resolution professional will issue a Request for a Resolution Plan(RFRP) under which the basis of selection of resolution plan will be laid. The resolution plan with the highest score will be considered as the Base Resolution Plan after the approval by the committee of creditors.
    
6. The creditors shall be given 5 days prior notice of the meeting and the notice shall contain the date, time, venue and the list of the creditors in FORM P2 along with the amount due to them as per regulation 14.

Management of Affairs of the Corporate Debtor during the process
Unlike the corporate insolvency resolution process, the board of directors of the corporate debtor continues to be responsible for the management of the corporate debtor's affairs during the pendency of the PPIRP, and they have a responsibility to protect and preserve the value of the corporate debtor's property and maintain its status as a going concern.

The committee of creditors may provide directions/guidelines based on which the corporate debtor's management may be continued, and the committee may seek any information necessary for that purpose from the corporate debtor. However, in the cases where the corporate debtor has acted fraudulently, such affairs of the corporate debtor may get vested with the resolution professional.

Preparation of List of Claims
The corporate debtor produces a list of claims, including information of the individual creditors, security interests, and guarantees, and presents it to the resolution professional under PPIRP. Based on the preliminary information memorandum obtained from the corporate debtor, the resolution professional simply validates the list of claims and writes the information memorandum.

If any loss or damage is sustained by any person, due to the omission in the information memorandum, then the corporate debtor will be liable to the person the compensation for the loss.

If the application for both PPIRP and CIRP is filed
In the case where PPIRP and CIRP have been filed, the PPIRP shall be given a preference. This is significant because, upon the occurrence of any default, any financial or operational creditor may petition for the initiation of CIRP. This gives the corporate debtor the option of resolving its bankruptcy through a PPIRP if that option is currently being examined by the debtor.

Conversion into Corporate Insolvency Resolution Process (CIRP)
Section 54O of the IBC allows the committee of creditors to commence CIRP proceedings against the corporate debtor after the initiation of PPIRP but before the approval of the resolution plan. This can only be done if the majority of the creditors' i.e. 66 % vote in this favour.

In such a case, the Resolution Professional shall file an application in the NCLT for the commencement of CIRP. The National Company Law Tribunal then may pass an order for the termination of PPRIP and the commencement of CIRP.

Benefits of the Pre-packed resolution process over CIRP?
It has been observed from the current scenario, that the PPIRP will turn out to be more beneficial in comparison to the formal Corporate Insolvency Resolution Process, as it is less time consuming and provides a fair chance to the corporate debtor to restructure the organization. The key benefits of the PPIRP over CIRP are a follows:

• One of the most common critiques of the CIRP has been the time taken to settle the matter. At the end of December 2020, over 86% of 1717 ongoing insolvency resolution proceedings had crossed the 270-day threshold. One of the key reasons behind delays in the CIRP is prolonged litigations by erstwhile promoters and potential bidders. The new insolvency system for the MSMEs is limited to a maximum of 120 days with only 90 days available to the stakeholders to bring the resolution plan to the NCLT
   
• Another key difference between Pre-pack and CIRP is that the existing management retains control in case of pre-pack, while a resolution professional takes control of the debtor as the representative of the financial creditors in CIRP. The initiative leads to minimizing disruption of operations about CIRP.
   
• The PPIRP is comparatively more cost-effective than the CIRP. Money is spent less in comparison because less time is spent and several measures are done toward settlement before coming to the Adjudicating Authority.
   
• The interference of the judicial system is minimal in the PPIRP, which provides a chance for the parties to negotiate amongst themselves.

These are only the observations made when only the guidelines and rules regarding the new resolution process have been passed. The main differences and the question of which process is better can only be answered effectively after seeing the results of the new resolution process.


The backdrop to the process
With numerous benefits, the new resolution process also possesses a major issue of non-availability of the scheme to a major portion of organizations:

• As per the ordinance which has introduced Chapter III-A calls for the prior registration under the MSME Development Act for a corporate debtor to be eligible for the pre-packed insolvency resolution process. According to the national sample survey 73rd round, there are an estimated 6.3 crore MSMEs that exist in India(See here). However, as per the data available with the Udyam Registration (MSME registration) website, only 26.42 lakhs of MSMEs have been registered. (See here)Hence, very few MSMEs are eligible to avail this option.
   
• Also, this option is only provided to companies and limited liability partnerships. Thus, it keeps sole proprietorship, partnerships ah Hindu Undivided Family types of MSMEs out of the ambit of the pre-pack resolution process thereby further restricting the numbers of MSMEs eligible for pre-pack.

Hence, this issue should be reconsidered by the government again and appropriate action shall be taken soon. Better observation of the new process can be made by considering the views of the experts in this matter.

Sunil Mehta, the Chief Executive Officer of the Indian Bank Association in a recent interview shared his views upon the new Pre-Packaged Insolvency Resolution Process. He has been a member of the committee which proposed this resolution plan; hence he can deliberately explain the concept which has been signed. He said that this framework is altogether different from what is available under IBC and hence the 120 days timeline which has been prescribed is very much reasonable. In fact, here the initiation process happens much before it goes into the NCLT for admission.

He further stated that this new mechanism will provide a lot of relief to the MSME segment. If an MSME has gone for restructuring, they will not be exposed to the risk of arm twisting by an operational creditor or small creditors who generally constitute the majority. And, the creditors will have a resolution by the corporate along with the immunity by the IBC. On the other hand, it's a facility available to the promoters to revive the unit, especially in the MSME sector.

If the promoter has bonafide intentions, there is no deliberate intention for diversion of funds or avoidance of transaction on their part for which they will give a declaration and can prove that the problems have arisen because of the reasons beyond the control of the promoter, then the creditors may support the resolution and that resolution can really help them in sustaining in these difficult times of the pandemic where many of the corporate and small MSME units have gone out of the viability.

The chairman of the Insolvency and Bankruptcy Board of India (IBBI), M.S Sahoo (see here) said that:
This process is informal until a certain point and then becomes formal. It combines debtor-in-possession and creditor-in-control situations. It is neither a totally private nor a completely public procedure; it permits a firm to submit a base resolution plan that is subject to Swiss challenge for value maximization if it is eligible under Section 29A (which disqualifies willful defaulters).

PPIRP provides a cost-effective, fast, and efficient alternative bankruptcy resolution framework for corporate persons designated as MSMEs, ensuring a good signal to the debt market, job preservation, ease of doing business, and the preservation of company capital.� as per the Ministry of Corporate Affairs.

Conclusion
The new resolution process commonly called the Pre-packaged Insolvency Resolution Process gives the chance to the MSMEs to restructure their debts and start again. While protecting stakeholders' interests, it also offers sufficient protection to prevent corporations from abusing the system to avoid paying payments to creditors. Meanwhile, it also aids the corporate debtors in reaching an agreement with lenders to repair their credit and address the full risk side of the business. The main feature of this process is that it shortens the time of litigation which in the previous resolution process used to take a lot of time of parties as well as the tribunal.

It is very difficult to quantify the benefits right now because we know that it's only been a while since the ordinance has been passed by the government and the organizations related to it are also yet to collect the data. Hence, the companies which are still under the process of restructuring their companies due to the pandemic, if they avail the pre-pack resolution plan and thereby come out with resolutions that are acceptable to the lenders, then a large chunk of it can get resolved within this framework.