On September 14, 2021, in a first of its kind, M/s GCCL Infrastructure & Projects Ltd. (‘GCCL’) became the first case to initiate, the Pre-Packaged Insolvency Resolution Process (‘PIRP’), which was subsequently admitted by the Ahmedabad bench of National Company Law Tribunal.¹

To deal with the financial and economic distress of small businesses, which had been significantly impacted post the Covid-19 pandemic, the PIRP was introduced under chapter IIIA² of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) earlier this year.

The aim for introducing this mechanism was to provide for an alternative resolution process for such entities which qualify as a micro, small or medium enterprise (‘MSME’) under sub-section (1) of section 7 of the Micro, Small and Medium Enterprises Development Act, 2006 (‘MSMED Act’) in a manner that is friendly, effective with a shorter timeline and an efficient methodology.

The PIRP enables the creditors and owner(s) of a business to agree to sell the business to an interested buyer. The buyer may be a third party or someone related to the business. The PIRP, in contrast to the corporate insolvency resolution process (‘CIRP’) has a hybrid structure that blends both formal and informal approach to address the insolvency issues. It allows creditors, promoters and other shareholders to come together to identify a prospective buyer and negotiate a resolution plan before approaching the National Company Law Tribunal. CIRP, on the other hand, more frequently, results in sale or liquidation of the troubled business. The resolution professional appointed by the court takes charge of the business and then draws up and implements a plan of resolution.

The PIRP, under the new provisions, are required to be completed within a period of one hundred and twenty days from the pre-packaged insolvency commencement date³ out of which 90 days are allotted to the Resolution Professional to file a resolution plan with the Adjudicating Authority (‘AA’).

On admission of the PIRP, the AA shall, declare a moratorium⁴ under section 14 of the IBC. The period of moratorium shall be effective from the date of order of moratorium till the date where pre-pack insolvency resolution process period comes to an end.

PIRP allows the assets of distressed businesses to be quickly re-allocated into the economy rather than being subjected to prolonged litigations. While the primary purpose of the IBC itself is to revive the highly distressed businesses, PRIP acts more like an alternative dispute resolution process as the role of the resolution profession in PIRP is akin to that of an ombudsman or a monitoring authority and the promoters along with the creditors make necessary decisions regarding the framing and implementation of the process. These pre-packs are better suited for small businesses since the creditors and business owners along with interested buyers, having being retained their power to manage the affairs of the corporate debtor⁵, contrary to CIRP, are able to make crucial business decisions than resolution professionals in courts.

While the fate of this new process is yet to be witnessed in practice, this possibility of an out-of-court arrangement with interested buyers, is likely to smoothen the process for the MSMEs which contribute 45% of the overall exports from India. Being backbone of the national economic structure, it was important that necessary steps be taken for the Indian MSME sector which had been hit by the pandemic adversely. The PIRP is a welcome step and definitely a step-in aid for the revival of the economy.

By - Rishika Jain