Introduction
Financial distress experienced by Micro, Small, and Medium Enterprises (MSMEs) in India is often not an indication of fundamental business weaknesses but rather the result of external shocks like delayed payments, supply chain disruptions, or working capital gaps.
Traditional insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) have proven to be costly, time-consuming, and disruptive for these smaller enterprises. To address this, the government introduced the Pre-Packaged Insolvency Resolution Process (PIRP) in 2021—a hybrid framework that combines the flexibility of out-of-court restructuring with the legal finality of the IBC.
Designed exclusively for MSMEs, PIRP aims to resolve defaults faster, more affordably, and with minimal business disruption. It uniquely allows existing promoters to remain in control of the enterprise while providing creditors with the assurance of a statutorily regulated resolution process.
This write-up provides a comprehensive overview of the PIRP mechanism, its legal framework, procedural roadmap, benefits, and challenges, along with strategic considerations for its adoption.
Understanding PIRP under the IBC
PIRP is governed by Chapter III-A of the Insolvency and Bankruptcy Code, 2016, and its legal framework is built on three core pillars:
- Eligibility Criteria: The process is exclusively for corporate debtors classified as MSMEs (companies and Limited Liability Partnerships) under the MSME Development Act, 2006. The corporate debtor must have committed a default of at least Rs. 10 lakhs and must not have undergone a PIRP or Corporate Insolvency Resolution Process (CIRP) in the preceding three years.
- Stakeholder Approval: Before an application can be filed with the National Company Law Tribunal (NCLT), the debtor must secure approval from unrelated financial creditors representing at least 66% of the financial debt. Additionally, the shareholders (by special resolution) or partners (by a three-fourths majority) must approve the initiation.
- Promoter Eligibility: While Section 29A of the IBC normally disqualifies certain promoters from submitting a resolution plan in a regular CIRP, Section 240A provides a crucial relaxation for MSMEs. This allows existing promoters to submit a base resolution plan, even if the company’s account is classified as a Non-Performing Asset (NPA).
These strict eligibility criteria are designed to ensure that the PIRP benefits genuine, distressed MSMEs and is not misused by wilful defaulters.
The PIRP Process: A Step-by-Step Guide
PIRP is a structured process designed to be completed within a fixed timeframe:
- Pre-Filing Stage: The corporate debtor prepares a base resolution plan, often with input from key creditors, and proposes a Resolution Professional (RP) to oversee the process.
- Application to NCLT: After obtaining the necessary approvals from creditors and shareholders/partners, the debtor files an application with the NCLT. This application must be accompanied by the base resolution plan, financial disclosures, and the written consent of the proposed RP.
- Admission and Moratorium: Upon admitting the application, the NCLT declares a moratorium, which prohibits legal actions by creditors against the debtor. The NCLT also formally appoints the RP.
- Debtor-in-Possession Model: A key feature of PIRP is that the existing management continues to run the day-to-day operations. The RP’s role is to oversee compliance, manage the process, and convene meetings of the Committee of Creditors (CoC).
- Resolution Plan Consideration:
- The CoC first evaluates the base resolution plan submitted by the promoter.
- If the CoC finds the plan feasible and it does not impair the rights of operational creditors, it can approve it directly with a 66% majority vote.
- If not, the RP must invite competing resolution plans through a “Swiss challenge”. The CoC then approves the plan that maximizes value for all stakeholders.
- NCLT Approval: The CoC-approved plan is submitted to the NCLT for final sanction. The entire process is statutorily mandated to be completed within 120 days: 90 days for CoC approval and 30 days for NCLT confirmation.
This hybrid model provides the speed and flexibility of an informal workout with the legal certainty of a court-approved resolution.
Advantages for MSMEs
PIRP offers several distinct advantages tailored to the needs of MSMEs:
- Speed and Certainty: The 120-day timeline is significantly shorter than a typical CIRP, which can often extend beyond a year.
- Cost-Effectiveness: With fewer NCLT hearings and a more collaborative process, PIRP is generally less expensive than a full-fledged CIRP.
- Continuity of Management: Allowing promoters to retain operational control is vital for MSMEs, which often depend heavily on founder expertise and relationships.
- Collaborative Approach: Since creditor consent is required upfront, the process encourages cooperation and negotiation rather than confrontation.
- Value Preservation: The moratorium protects the company’s assets from creditor actions, ensuring the business can continue as a going concern during restructuring.
Challenges and Limitations
Despite its advantages, PIRP has faced practical challenges:
- High Entry Barrier: The requirement to secure 66% creditor approval before filing can be a significant hurdle, especially for MSMEs with multiple lenders who may have conflicting interests.
- Limited Scope: The process is only available to MSMEs, leaving larger distressed companies without access to this efficient tool.
- Judicial Delays: While the statutory timeline is short, backlogs at the NCLT have, in some cases, caused the process to extend beyond the 120-day limit.
- Risk of Misuse: Robust oversight by the RP and CoC is essential to prevent promoters from exploiting the debtor-in-possession model or the moratorium.
- Low Adoption Rates: Since its inception, PIRP has seen relatively low uptake, partly due to a lack of awareness and skepticism from some creditors.
Strategic Considerations for Promoters
For MSME founders, PIRP presents both an opportunity and a responsibility. To navigate it successfully, promoters should:
- Prepare a Realistic Base Plan: The success of a PIRP is heavily dependent on the credibility and commercial viability of the initial resolution plan.
- Engage Creditors Early: Building consensus with creditors before initiating the process is critical for smooth admission and approval.
- Utilize the Moratorium Wisely: This period should be used to stabilize operations, restore stakeholder confidence, and implement foundational aspects of the resolution plan.
- Maintain Full Transparency: Any lack of disclosure or evidence of bad faith can lead to the termination of the PIRP and a potential conversion into a CIRP, where the promoter loses control.
- Offer Fair Commercial Terms: While promoters retain control under PIRP, they must be prepared to offer reasonable commercial terms to creditors to secure their approval.
AMLEGALS Remarks
The Pre-Packaged Insolvency Resolution Process represents a significant evolution in India’s insolvency framework, offering MSMEs a faster, more collaborative, and cost-effective restructuring alternative. While implementation challenges remain, PIRP signals a crucial policy shift from liquidation towards enterprise rescue.
For MSMEs facing distress, pursuing a PIRP requires realistic planning, proactive creditor engagement, and transparent conduct. When strategically executed, it offers a genuine second chance to overcome financial difficulties and return to a path of sustainable growth.
— Team AMLEGALS
Please reach out to us at rohit.lalwani@amlegals.com in case of any query.