MSME Pre-Pack Process Sees Limited Effectiveness, Says IBBI Report; Suggests Steps to Boost Adoption

The Pre-Packaged Insolvency Resolution Process (PPIRP) introduced in 2021 for Micro, Small, and Medium Enterprises (MSMEs) has shown limited success, according to the latest annual report by the Insolvency and Bankruptcy Board of India (IBBI). Aimed at offering a faster and more cost-effective alternative to traditional insolvency resolution methods, the PPIRP has admitted only 10 applications since its inception. Of these, one case was withdrawn, five resolution plans have been approved, and four cases are still pending as of March 2024.

The report, published on October 4, 2024, highlighted several factors contributing to the low adoption rate of PPIRP. These challenges can be grouped into three categories: debtor-related, creditor-related, and issues tied to institutional infrastructure.

One key reason is the reluctance of defaulting MSME promoters to initiate the PPIRP process due to concerns about intense scrutiny and the delegation of certain powers to resolution professionals. On the creditor side, lower-level bankers often hesitate to approve PPIRP proposals, passing the responsibility up the chain. This reluctance, combined with delays in obtaining bank approvals, is seen as one of the most significant barriers to the success of the process.

Another issue highlighted by the IBBI report is the inadequate adjudicating infrastructure, leading to delays in resolving cases. Such delays can reduce the chances of approving the base resolution plan submitted by the debtor at the start of the process, which is one of the primary advantages that PPIRP offers over the Corporate Insolvency Resolution Process (CIRP).

To improve the effectiveness of PPIRP for MSMEs, the IBBI report suggests several key measures:

1. Active Support from Lenders: Lenders need to engage more actively in the PPIRP process by considering restructuring proposals from MSME promoters and supporting base resolution plans. Despite the legal complexities, lender participation is vital for establishing order and authority in implementing these plans.
2. Understanding MSMEs’ Unique Needs: Creditors should recognize the differences between MSMEs and larger enterprises. MSME promoters are typically involved in daily operations, unlike large firms where management tasks can be delegated. Given this, the PPIRP allows businesses to continue running under the leadership of their promoters, a critical factor for MSME continuity.
3. Addressing Suspicion: Unless there are signs of fraud or illegal activities, creditors should be open to accepting base resolution plans proposed by MSME promoters or related parties rather than prioritizing external proposals.
4. Raising Awareness: There is a need for better awareness among MSMEs about the benefits of PPIRP. The process is designed to help companies overcome financial challenges while preserving the role of promoters, contrary to misconceptions that it strips away ownership.

By addressing these issues, the report emphasizes that the PPIRP could become a more widely adopted tool for MSME revival, helping businesses navigate financial distress more effectively.

Disclaimer: This article is for informational purposes only and should not be considered as financial or legal advice. Readers are encouraged to consult with professionals before making any decisions.