How Will the New Pre-Packaged Insolvency Mechanism Help MSMEs?

The Indian government has developed a new insolvency resolution process for MSMEs: The Pre-Packaged Insolvency Resolution Process (PPIRP).


In India, the government has launched a revised insolvency resolution strategy for small and medium-sized businesses. There are currently 7,00,000 companies in India that are officially classified as MSMEs. With the new Pre-Packaged Insolvency Resolution Process (PPIRP), most of these businesses will have a new insurance framework and benefit from this policy change.

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Under the Indian context, a pre-packaged insolvency means a settlement where the resolution of a company's business is contracted with a client before the assignment of an insolvency professional.

Pre-Packaged Insolvency Resolution Process – PPIRP is a mix of informal and formal systems. Under this, everyday MSMEs’ financial processes will be further expanded until they enter the National Company Law Tribunal (NCLT) for legal resolutions. From there, specific solutions based on the current Insolvency and Bankruptcy Code (IBC) will be processed and monitored.

Features of Pre-Packaged Insolvency Resolution Process (PPIRP)

Following are the characteristic features of PPIRP:

Pre-packaged Insolvency bankruptcy is an almost formal process that goes to the heart of non-private restructuring and formal bankruptcy.

It will be based on an agreement if creditors and debtors agree to reform the business or entity.

A predetermined resolution plan may be agreed upon between the debtor and the creditor.

The down payment package solves the company’s debt problem through an agreement between creditors and investors, not through an auction process.

Putting MSMEs First

The government has analysed PPIRP as fit to introduce pre-packaging for MSMEs, as these businesses are essential to the Indian economy. Not only do they employ a large population, but they also make a significant contribution to the country’s GDP. Furthermore, MSMEs are the hardest hit by the current COVID-19 outbreak in India. And easing their solvency issues by capital flow is only suitable for their upkeep.

What are the advantages of Pre-packs over the Corporate Insolvency Resolution Process (CIRP)?

A main criticism of CIRP is the time it takes to find a solution for MSMEs. In December 2020, more than 86% of pending proceedings exceeded the set 270 days limit for resolutions. One of the main reasons for the CIRP delay is the delay in the lawsuits from former sponsors and potential bidders. On the other hand, the new pre-pack has a maximum resolution limit of 120 days, and involved parties have 90 days to submit a draft solution to NCLT.

Implementation of a Debt Model via Pre-packaged Insolvency Resolution

The PPIRP framework introduced through the government ordinance is an experiment of sorts and differs from the standard Corporate Insolvency Resolution Process (CIRP). Unlike CIRP, for MSMEs, it is a ‘borrower and lender advanced framework’ controlled model. CIRP, on the other hand, is a professional property owner and lender auditor framework. In the pre-pack for MSMEs, the debtor will continue to control and run the enterprise till resolution happens. In normal CIRP, the Resolution Professional (RP) comes in and takes over on the day of the admission itself.

What’s next for MSMEs in India?

The Pre-packaged Insolvency Resolution Process (PPIRP) is similar to pre-packaged foods that can be opened and used directly. This could be an essential reform for MSMEs experiencing financial difficulties due to the pandemic or other problems. PPIRP will be cost-effective, fast and results-oriented. The new policy service will be made available to all companies over time, as legal issues related to the provisions are resolved by case law; its benefits, therefore, are yet to be seen.

Aakash Sharma
Aakash Sharma
Aakash writes on Startup Ecosystem, Policies, Legal and Regulatory aspects of business planning. An alumnus of Delhi University, he is assistant editor at Dutch Uncles.

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