The Pre-Packaged Insolvency Resolution Process (PPIRP) introduced in 2021 for MSMEs has seen limited effectiveness, said insolvency regulator Insolvency and Bankruptcy Board of India (IBBI) in its latest annual publication. The process, which aimed at providing a quicker and cost-effective alternative insolvency resolution framework for the revival of MSMEs, has admitted only 10 applications since its inception, of which one case was withdrawn, while the resolution plans for five cases have been approved, leaving four cases ongoing as of March 2024.
The subdued response to PPIRP could stem from various factors which could be bifurcated as debtor-related, creditor-related or institutional infrastructure-related, according to the report published on October 4, 2024.
One of the reasons might be that the promoters of defaulting MSMEs may not be comfortable with initiating PPIRP due to the intense scrutiny of the company’s affairs and the delegation of certain powers to the resolution professional.
Another reason could be the reluctance of lower-level bankers to make decisions regarding the approval of PPIRPs and instead delegate this responsibility. In this context, obtaining approval from banks has proven to be the most challenging aspect of PPIRP, the report added.
Moreover, the absence of a robust adjudicating infrastructure has contributed to delays in resolving cases, the IBBI report noted while delays in PPIRPs could result in reduced prospects for approval of the initial base resolution plan submitted during the PPIRP application.
As a result, the report said the corporate debtor (CD) — defaulting MSME — might be discouraged from initiating a PPIRP if the proposed base resolution plan would have limited potential for approval—an advantage that PPIRP typically offers over CIRP.
The report further suggested multiple factors to improve the adoption of PPIRP among MSMEs:
Active support from lenders: It called for MSMEs’ lenders to be willing to consider the restructuring proposals put forth by the promoters and agree to the base resolution plans submitted by them. Even as the legal process can be lengthy, the report noted that it is crucial for lenders to actively participate in order to establish authority, order, and direction in implementing these plans effectively.
“Many MSMEs encounter short-term financial challenges, which can often be overcome with some time for recovery and minor adjustments accepted by creditors,” it said.
Knowing distinction between large and small businesses: The report also called for creditors to understand the distinction between large enterprises and MSMEs with respect to operational continuity. “Unlike in larger firms, where responsibilities may be delegated to managers, MSME promoters typically remain intricately involved in day-to-day operations to ensure the entity’s smooth functioning.”
Hence, while the PPIRP allows for the company’s operations to continue under the promoter’s leadership, the report said creditors should not hesitate to pursue this option.
Addressing suspicion: The IBBI publication also suggested that unless there are suspicions of fraud or illegal activities related to the CD, the base resolution plan proposed by the promoter or related individuals should be given consideration to plans shared by external parties.
Better awareness: The report lastly also highlighted the need for improved awareness around PPIRP among MSMEs. “It’s crucial for the stakeholders to understand that the PPIRP process is designed to aid companies in overcoming financial hurdles, rather than stripping ownership from their promoters,” it said.