Understanding Pre-Packaged Insolvency under IBC

The Insolvency and Bankruptcy Code, 2016 (IBC) was introduced with the objective of providing a consolidated and time-bound framework for insolvency and bankruptcy resolution of corporate persons, partnership firms, and individuals. Since its enactment, the IBC has undergone several amendments to address practical challenges and economic realities. One such significant amendment came through the Insolvency and Bankruptcy Code (Amendment) Act, 2021, which introduced the Pre-Packaged Insolvency Resolution Process (PIRP).

The PIRP is considered a landmark reform as it offers a hybrid insolvency resolution framework specifically designed for Micro, Small, and Medium Enterprises (MSMEs). Its introduction was influenced by the economic distress caused by the COVID-19 pandemic and the need to provide MSMEs with a more flexible, cost-effective, and speedy insolvency resolution mechanism.

This article provides a comprehensive overview of the PIRP mechanism, its legislative framework, procedure, benefits, challenges, and judicial interpretation under the IBC.

Background of Pre-Packaged Insolvency

MSMEs form the backbone of India’s economy. Nearly 60% of businesses in India fall within this category, and the sector contributes around 29% to the country’s GDP. However, the MSME sector was severely affected by the pandemic, leading to defaults across industries.

In response, the government raised the threshold for initiating corporate insolvency proceedings under IBC from ₹1 lakh to ₹1 crore, to protect smaller firms. Alongside, the Pre-Packaged Insolvency Resolution Process was introduced as a dedicated insolvency mechanism for MSMEs.

PIRP seeks to combine the flexibility of out-of-court settlements with the formal recognition of judicial processes, creating a hybrid model where the corporate debtor retains control while being supervised by a resolution professional and the Committee of Creditors (CoC).

Legislative Framework on Pre-Packaged Insolvency under IBC

The PIRP mechanism is provided under Chapter III-A (Sections 54A to 54P) of the IBC. The framework specifies:

• Eligibility: Only MSMEs registered under the Micro, Small and Medium Enterprises Development Act, 2006 are eligible.
• Default threshold: Minimum default of ₹10 lakh and maximum default of ₹1 crore.
• Timeline: Entire process to be completed within 120 days.
• Oversight: Adjudicating Authority (NCLT) has jurisdiction, with the process monitored by a Resolution Professional (RP).

Thus, PIRP is not a substitute for Corporate Insolvency Resolution Process (CIRP), but a special framework tailored for MSMEs.

Key Eligibility Criteria for Pre-Packaged Insolvency under IBC

An MSME corporate debtor may initiate PIRP if the following conditions are satisfied:

• The debtor has committed a default of at least ₹10 lakh but less than ₹1 crore.
• The debtor has not undergone a PIRP or completed a CIRP in the last three years.
• The debtor is not already undergoing a CIRP.
• The debtor is not ineligible under Section 29A of IBC.
• The debtor is not subject to an order of liquidation under Section 33 of IBC.

These conditions ensure that PIRP is available only to genuine cases and not as a tool for misuse.

Procedure of Pre-Packaged Insolvency

The PIRP follows a structured yet flexible process:

Initiation of PIRP

• The corporate debtor must obtain:
  • A declaration from a majority of its directors/partners.
  • A special resolution (by three-fourths of directors or partners).
  • Approval of unrelated financial creditors holding 66% voting share.
• An Insolvency Professional (IP) is proposed as the Resolution Professional (RP) to oversee the process.
• The application is filed with the Adjudicating Authority (NCLT), which has 14 days to admit or reject the application.

Commencement and Moratorium

On admission:

• A moratorium under Section 14 comes into force, protecting the debtor from recovery actions.
• The management remains with the corporate debtor, unlike CIRP where management shifts to the RP.
• The RP supervises and ensures compliance with the Code.

Constitution of CoC

• The Committee of Creditors (CoC) is constituted within 7 days of commencement.
• The first CoC meeting must be held within 7 days of constitution.
• The CoC may resolve (by 66% majority) to vest management with the RP if required.

Submission of Base Resolution Plan

• Within 2 days of commencement, the corporate debtor must submit a base resolution plan to the RP.
• The RP places it before the CoC.

If the base resolution plan:

• Does not impair operational creditors’ claims → It can be directly considered by the CoC.
• Impairs operational creditors’ claims → RP invites other resolution plans under a Swiss Challenge mechanism to compete with the base plan.

Approval of Resolution Plan

• The CoC must approve a resolution plan with at least 66% voting share.
• The approved plan is submitted to NCLT, which must approve/reject it within 30 days.
• If no plan is approved, PIRP is terminated.

Timelines

• 90 days: Resolution plan to be approved by CoC.
• 30 days: NCLT to approve plan.
• 120 days total: Entire PIRP must be completed.

This is much shorter compared to CIRP, which may extend up to 330 days.

Comparison: Corporate Insolvency Resolution Process vs Pre-Packaged Insolvency under IBC

Judicial Developments on Pre-Packaged Insolvency under IBC

In Re: GCCL Infrastructure & Projects Ltd. (2021)

The first case where PIRP was admitted by NCLT, Ahmedabad. It set the precedent for the process and highlighted the need to balance creditors’ and homebuyers’ interests.

Krrish Realtech Pvt. Ltd. (NCLAT, 2022)

The NCLAT held that objections can be raised at the stage of admission if the application does not comply with requirements (like creditors’ consent). This reinforced the principle of natural justice in PIRP.

Amrit India Ltd. (NCLT, 2022)

A case where the resolution process exceeded the 120-day limit, showing practical delays despite statutory timelines.

Sudal Industries Ltd. (NCLT, 2023)

Illustrated that even larger defaults (₹132 crore) could be attempted under PIRP when the entity is classified as MSME.

These cases show that while PIRP is promising, its success depends on proper implementation and judicial efficiency.

Benefits of Pre-Packaged Insolvency under IBC

• Cost-Effective: Since management remains with the debtor, costs of shifting control are avoided. Litigation and disruption expenses are also reduced.
• Speedy Resolution: Maximum duration of 120 days helps preserve asset value and business continuity.
• Operational Continuity: Management control with debtor ensures minimal disruption to day-to-day operations.
• Value Maximisation: Swift process prevents asset depreciation compared to CIRP.
• Flexibility: Combines informal negotiations with formal recognition, balancing interests of creditors and debtors.

Challenges and Issues with Pre-Packaged Insolvency under IBC

• Delays in Practice: Despite timelines, several cases exceeded the 120-day limit.
• Limited Scope: Only MSMEs benefit, leaving other distressed sectors outside its reach.
• Creditor Disagreements: Conflicts among creditors delay approval of plans.
• Judicial Backlog: NCLT has limited benches and judges, slowing the process.
• Risk of Misuse: Promoters may attempt to use PIRP to retain control without genuine revival efforts.
• Timeline Ambiguities: Section 11A requirements on filing timelines have created interpretation issues.

Conclusion

The Pre-Packaged Insolvency Resolution Process under the IBC is a unique mechanism introduced to protect MSMEs while ensuring creditor participation and judicial oversight. It is faster, cost-effective, and flexible compared to CIRP. At the same time, practical issues such as delays, limited scope, and judicial bottlenecks have restricted its effectiveness.

Going forward, the success of PIRP will depend on strengthening NCLT infrastructure, expanding its scope, and ensuring strict adherence to timelines. As jurisprudence evolves, PIRP may emerge as a robust alternative that balances the interests of debtors and creditors, while contributing to economic stability.