The current scenario of MSMEs has been stressful with the striking breakdown during the Covid-19 pandemic, earlier it was Demonetization / GST etc. were there. So for a quite long time these are major reason which triggers the hampering of this Segment.
This article was based on addressing the Scenario of stress in the MSME industry with latest entrant of addressing Stress in the form of PPIRP (Pre-Packaged Insolvency Resolution Process) concept.
As it is well known fact that several industries, labourers and workers collaborating for the imminent master plan for escalating productivity were left in extreme hardships due to the lack of volatile environment across the markets. While activities resumed following the escape of the lockdown, the harsh sufferings haven’t diverted due to no abundant relief being provided to the MSMEs by the government. The position of MSMEs has carried an overblowing insolvency situation where more than 41% of the start-ups and small-scale industries have exhausted their utilities or have funds of one month left.
Last year the government has decided to remove the difference between the definition of manufacturing-based MSMEs and service-based MSMEs.Central Government, notifies that criteria for classification of micro, small and medium enterprises. The said notification was into effect from 01.07.2020. Also regarding UDYAM Registration, Ministry has replaced the erstwhile process of filing of Udyog Aadhaar Memorandum, by ‘Udyam’ registration on a portal developed by this Ministry based on composite criteria of classification of MSMEs, notified vide Notification dated 26.06.2020.
What could be the best possible way out of the plight? In the context of Covid-ravaged impact on the industries, aspiring entrepreneurs have got framed into insolvency, coercing them to shut down their businesses. Finance and Corporate Affairs Minister Madam Nirmala Sitharaman had issued a draft of the Insolvency and Bankruptcy Code(Amendment Bill), 2021.
In this article we will be going through with basic facts & figures of MSME followed by an overview of this so called concept of PPIRP on the parameters of WHY this is required and for WHAT reasons we needed an PPIRP concept and entire gambit of HOW this PPIRP works along with detailed Mechanism. Towards last Challenges ahead in probable times will going to be covered and ending with WAY FORWARD.
Facts& figures about our MSME:
As MSME is centre of attraction of this whole mechanism, let us have a glance about MSMEs.
The MSMEs in India are playing a crucial role by providing large employment opportunities at comparatively lower capital cost than large industries as well as through industrialization of rural & backward areas, inter alia, reducing regional imbalances, assuring more equitable distribution of national income and wealth. It was recorded that the contribution of MSME segment in GDP which is approximately 30.27 Share of MSME in All India GDP.As per the National Sample Survey (NSS), conducted by National Sample Survey Office, Ministry of Statistics & Program Implementation during the period 2015-16, there were 6.33 Crore unincorporated non-agriculture MSMEs in the country engaged in different economic activities 1.97 Crore in Manufacturing, 0.03 Lakh in Non-captive Electricity Generation and Transmission, 2.30 Crore in Trade and 2.07 Crore in Other Services.
Also the survey says that MSME sector has been creating 11.10 crore jobs (majorly in Trade related then followed by Other Services and Manufacturing areas) in the rural and the urban areas across the country.
Micro sector with 6.31 Crore estimated enterprises provided employment to 10.76 Crore persons that in turn accounts for around 97% of total employment in the sector. Small sector with 3.31 lakh and Medium sector with 5000 estimated MSMEs provided employment to 31.95 lakh (2.88%) and 1.75 lakh (0.16%)persons of total employment in MSME sector, respectively.Out of 11.10 Crores employees in MSME sector, 8.45 Crore (76%) are male employees and remaining 2.65 Crore (24%) are females.
Why the concept of PPIRP is needed?
Here I would like to quote a famous line that says–“A person’s true strength will be known in his revival, not in his survival”.
As this famous says that A person’s or rather we can corelate over here with a Business Unit as it is been driven by a HUMAN touch – so here we can say that “A Business Unit true strength will be known in its revival, not in its mere survival”.
In the continuation of the quest of WHY, it is very much pertinent to have view on what is happening across the world , where some countries/ areas are already having this PPIRP type concept namely -the system of PPIRP has been famously advertised as an insolvency resolution mechanism by the United Kingdom and European contingents over the past decade.It is the same procedure being forwarded worldwide.The concept got instilled in India after its successful implementation and sustainability in the global scenario.The common call across the international column is to delineated its attention towards the transparencyof the PRIRP
Let’s dive more into the background:
In June 2020, the Government constituted a sub-committee of the ILC (Insolvency Law Committee) under the chairmanship of Dr. M. S. Sahoo, Chairperson, IBBI (Insolvency and Bankruptcy Board of India) to make recommendation on the pre-pack insolvency resolution process (PPIRP).
The said sub-committee of the ILC had submitted its Report on Pre-packaged Insolvency Resolution Process (PPIRP) on 31st October 2020 along with a pre-pack framework within the basic structure of the Code for the Indian market. After that the MCA, vide notification dated 8th January-2021, invited comments/suggestions from public on this PPIRP framework.
It was proposed to implement the said PPIRP from immediate effect, to reform the MSME Sector. This was expected to be the biggest reform to restructure the MSME.It is applicable to all the corporate persons (Companies registered under the Companies Act, LLPs and other corporate entities) which are covered under the defined of “MSME” as defined in section 7 of the MSMED-Act, 2006. Minimum default is Rs. 10 Lacs to opt for this IPPIRP
Now moving forward in context of India this very date of 4th April 2021 is quite critical. Why it is critical is backed by a fact that in India, the 1st of its kind “Pre-packaged Insolvency Resolution Process (referred as PPIRP) for MSME sector, was introduced with The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 (referred as PPRIP Ordinance 2021) promulgated by an extra-ordinary ordinance dated 04/04/2021 by Government of India.
Now let us again address that question of why this framework is needed ?
Recent Happenings in IBC-2016:
We all are aware with the fact that from time to time the Governments have responded to save MSME with various measures such as moratorium on loan repayments, sector specific forbearance, infusion of liquidity into the banking system to provide credit to financially distressed firms, relief in asset classification banking norms, flexibility in director’s obligations to initiate insolvency proceeding, relief from compliance with specific legal obligations, etc.
Considering the current COVID 19 Pandemic certain measures were taken in the same line like , more experiments were done especially after the period of forbearance MSME expired on March 24, 2021 and to save viable units during Pandemic, Government considered to implement settlement framework under IBC-2016 in the form of PPIRP.
How this PPIRP works:
The entire mechanism under PPIRP framework is designed under major 6parameters namely:
|Step 1.||Eligibility Criterion|
|Step 2.||Pre-Commencement Phase|
|Step 3.||Application Phase|
|Step 4.||Post-Commencement Phase|
|Step 5.||Approval of Resolution Plan|
|Step 6.||Closure Proceedings|
Let’s see Stepwise mechanism,
A CD, which is an MSME as per the definition given under the MSMED Act- 2006, is eligible to apply for initiation of PPIRP, if it-
- has committed a default of minimum of ₹10 lakh;
- is eligible to submit a resolution plan under section 29A of the IBC-2016;
- has not undergone a PPIRP/CIRP during the 3 yrs. preceding the initiation date;
- is not undergoing a CIRP; &
- is not required to be liquidated by an order under section 33 of the Code.
- is having updated Udyam Registration Certificate or proof of investment in plant and machinery or equipment and turnover as per extant guidelines
- PPIRP intended to be a blended process, where pre-commencement phase is largely informal (offers flexibility for the CD and its creditors to swiftly explore and negotiate the best way to resolve stress in the business) and post-commencementphase (drives value maximization and bestows the resolution plan with the statutory protection) is formal.
- The following activities need to be undertaken in Pre-Commencement stage:
- Seeking approval of creditors,the applicant (Corporate applicant) shall convene meetings by serving the notice (minimum 5 days before the date of the meeting/s unless a shorter time is agreed to by all of them) to the Unrelated Financial Creditors (UFCs -that is, financial creditors who are not related parties of the CD).In cases where there are no UFCs, then meetings of Unrelated Operational Creditors (UOCs) will going to be called and the UOCs shall perform the same duties and functions as the UFCs.
- The notice of the meeting shall indicate the date, time, and venue of the meeting and specific agenda items for discussion.
- The applicant shall enclose a list of creditors and the amount due to each of them, along with the notice convening the meeting seeking approval for appointment of an IP as RP.
- In the meeting of UFCs, creditors having at least 10% of the value of debt shall propose the name of an IP eligible under the Regulations, for appointment as RP.
- UFCs representing not less than 66% in value of debt due to such creditors shall approve the appointment as RP and the terms of appointment.
- Majority of director/partners of the CD shall make a declaration in dedicated Form covering/stating:
- that the CD shall file an application for initiation within a definite time not exceeding 90 days,
- that the PPIRP is not being initiated to defraud any person, and
- the name of the IP approved by creditors to be appointed as the RP.
- Members of the CD shall pass a special resolution, or at least 3/4th of the total number of partners of the CD shall pass a resolution, approving the filing of an application for initiating PPIRP as required in Code.
- CD shall prepare a BRP (BASE RESOLUTION PLAN) in conformity with the requirements
Application Phase: (STEP-3)
The applicant shall file the application in electronic form, before the AA for initiating PPIRP.The said application shall be accompanied by the following documents:
- Record of default;
- Consent of the IP proposed to be appointed as RP,
- Approval of UFCs for initiation,
- Consent of the IP proposed to act as AR, if any,
- Declaration by Directors/Partners,
- Members’ Resolution or Partners’ Resolution;
- Declaration by CD regarding avoidance transaction(s),
- Report of the RP,
- Audited financial statements of the last 2F.Y.
- Provisional financial statements for current financial year made up to the date of declaration
- Latest and updated Udyam Registration Cert. or proof that the CD is an MSME;
- Affidavit stating that the CD is eligible under section 29A of the Code to submit resolution plan in the PPIRP of the CD;
- A statement of affairs made up to a date not earlier than 14 days from the date of application;
- A statement giving the names and addresses of the members or partners of the CD, with details of their respective shareholdings;
- Proof that the application fee of ₹15,000 has been paid;
- Proof that a copy of the application has been served to the IBBI; and
- Document that records the authority of the applicant to make the application, where the applicant is a member or partner of the CD.
Note that the applicant shall serve a copy of the application (for initiating PPIRP) to the IBBI before filing it with the AA. Now for AA role will mark over here that –
- Within 14 days of the receipt of the application, the AA shall admit the application, if the application is complete or reject the same, if incomplete. However, before rejecting the application, the AA shall provide a period of seven days to the applicant for rectifying the defects, if any, in the application. The AA shall also deal with any application for initiation of CIRP pending for admission in accordance with the Code while deciding on the application.
- The PPIRP shall commence on the date of admission of the application.
- The AA shall, on the PPIRP commencement date along with the order of admission, declare a moratorium of the purposes of sub-sections (1) and (3) of section 14 of the Code, appoint the IP named in the application as the RP, and cause a public announcement to be made by the RP.
- The duties of the IP shall cease if the application is either not filed within the time specified in declaration in Form 6 or is not admitted by the AA.
Post-Commencement Phase :(Step-4)
Once the initiation phase has passen by then-
- The process is required to be completed within a time frame of 120 days from the PPIRP commencement date.
- During the course of PPIRP,
- the management of the affairs of the CD shall continue to vest in the Board of Directors / the partners of the CD;
- the Board of Directors / partners of the CD shall make every endeavor to protect and preserve the value of the property of the CD, and manage its operations as a going concern; and (c) the promoters, members, personnel and partners of the CD shall exercise and discharge their contractual or statutory rights and obligations in relation to the CD.
- The CD shall, within two days of the PPIRP commencement date, submit to the RP, updated as on that date, (a) a list of claims, along with details of the respective creditors, their security interests and guarantees, and (b) a preliminary information memorandum (PIM) containing information relevant for formulating a resolution plan. If any person sustains any loss or damage as a consequence of the omission of any material information or inclusion of any misleading information in the list of claims or the PIM, every person who (a) is a promoter or director or partner of the CD at the time of submission of the list of claims or the PIM, or (b) has authorized the submission of the list of claims or the PIM, shall be liable to pay compensation.
- The CD shall submit the BRP to the RP within two days of the PPIRP commencement date. It may revise the BRP if permitted by the CoC.
- The RP shall make a public announcement, in Form P9, within two days of the commencement of the process in the manner specified in regulation 19.
- The RP shall exercise powers and carry out duties as required under section 54F.
Approval of Resolution Plan: :(Step-5)
- If BRP does not impair claims owed to operational creditors (OCs), the CoC may approve it for submission to the AA.
- If the CoC does not approve the BRP or the BRP impairs the claims of OCs, the RP shall invite prospective resolution applicants to submit resolution plans to compete with the BRP. He shall publish brief particulars of the invitation for resolution plans in Form P11, not later than 21 days from the PPIRP commencement date, in accordance with regulation 43.
- The invitation for resolution plans shall detail each step in the process, and the manner and purposes of interaction between the RP and the resolution applicant, along with corresponding timelines. It shall include (a) the basis for evaluation; (b) the basis for considering a resolution plan significantly better than another resolution plan; (c) the tick size; and (d) the manner of improving a resolution plan. It shall not require any non-refundable deposit for submission of or along with resolution plan.
- The resolution plans received in response to invitation and complying with the requirements of the Code and the Regulations shall be evaluated on the basis for evaluation. The resolution plan which gets the highest score shall be selected as Best Alternate Plan (BAP) for competition with the BRP.
- CoC may consider BRP for approval if no resolution plan is received.
- CoC may consider the BAP for approval if it is significantly better than the BRP. If it does not approve a significantly better BAP, the process terminates.
- If the BAP is not significantly better than the BRP, the RP shall disclose the scores of the BAP and BRP to submitters of these plans and invite them to improve their plans in accordance with regulation 48. i.e. Swizz Challenge Method will going to apply
- The resolution plan having higher score on completion of process of improvement shall be considered by the CoC for approval. If the CoC does not approve it, the process terminates.
Closure of PPIRP: :(Step-6)
The PPIRP closes in the following circumstances:
- On approval of either the BRP or the BAP by the AA.
- On expiry of 90 days if no resolution plan is submitted to the AA for approval.
- On rejection of resolution plan by the AA.
- On approval by the AA of application filed by the RP for termination of PPIRP, where the CoC approves termination with 66% of voting share.
- On conversion into CIRP based on an application filed by the RP, where the CoC approves so with 66% of voting share, and the CD is eligible for CIRP. The RP of the PPIRP is appointed as the IRP of the CIRP.
Also that on an order of termination in case either no resolution plan is approved by CoC or the resolution plan approved by the CoC does not result in change in management, where the AA has vested the management of the CD with the RP under section 54J.
PENALTY Clause :
Since this entire process is sitting basically on the management of Resolution Plan by the CDs, so what will happen if some fraud angle was proven in the due course ?
In this case below mentioned Sections of the Code will going to play a pivotal point-
- Section 67A: Fraudulent management of CD during PPIRP
On and after the PPIRP Commencement Date, where an officer of the CD, manages its affairs with the intent to defraud creditors or for any fraudulent purpose, the AA may, on an application by the RP, pass an order imposing upon any such officer, a penalty which shall not be less than Rs. 1 lakh but may extend to Rs.1 crore .
- Section 77A: Punishment for offences related to PPIRP
- a CD provides any information in the Application which is false in material particulars, knowing it to be false or omits any material fact, knowing it to be material; or
- a CD provides any information in the list of claims or the preliminary information memorandum which is false in material particulars, knowing it to be false or omits any material fact, knowing it to be material; or
- any person who knowingly and wilfully authorised or permitted the furnishing of such information under point (a) and (b), such CD or person, as the case may be, shall be punishable with imprisonment for a term which shall not be less than 3 years, but which may extend to 5 years or with fine which shall not be less than Rs.1 lakh , but which may extend to Rs. 1 crore, or with both.
- If any Director or Partner of CD deliberately contravenes the provisions of Chapter III-A, such person shall be punishable with imprisonment for not less than 3 years, but which may extend to 5 years, or with fine which shall not be less than Rs.1 lakh but which may extend to Rs.1 crore or with both.
The Plausible Roadblock Ahead for the MSMEs-
- Firstly, the proposed plan of the CDs needs to be present at the Committee of Creditor’s table before initiation. Even though the PPIRP allows the MSMEs to move forward without the additional clauses of section 29A, they are unsure if the condition of their NPAs is stressed. The creditors will be reluctant to proceed.
- There might be scenario, if the CoC accumulates the majority vote of 66%, the debtor in possession model could get transferred to the IP.
- Disruptions in evaluating the past unwanted debts, due to the reason thatimproper valuation transactions ,
- Lastly may be in continuation to the distressed units and the lenders it would finding it extremely difficult for matching up the escalation of PPIRP.
What Next in the Aberrant Path for MSMEs?
It was being expected that PPIRP shall provide speedier resolutions and hence a new Chapter under IBC was added with all checks and balances. With considerable learning and maturity of the ecosystem, and a reasonably fair Debtor-Creditor relationship in place, the ground was ready to experiment new options for resolution of stress under IBC in furtherance of its objectives.
It would be a significant reform in terms of returns to the creditors and the potential investors since its inception to liquidation. The path ahead would welcome several challenges as it would be essential to take operational creditors into confidence as per plan. Funds accumulation for repaying the creditors would impose a different concept of hurdles that need to be crossed for successfully leading the process. The insolvency mechanism needs to secure transparency so that the MSMEs could take big advantage of it.
In terms of World Bank report of the Ease of Doing Business Report, The lBC along with time to time amendments had catapulted India in World Bank’s Doing Business rankings from a lowly 142 in 2014 to 63 in 2019 and gradually to 52 as of 2020.
One of the important objectives of the Code is to bring the insolvency law in India under a single unified umbrella with the object of speeding up of the insolvency process.
The pre-packaged Insolvency Resolution Process (PPIRP) is like pre-packaged Food which can be opened and used. It may prove a big reform to MSME which is facing financial difficulties due to pandemic or other issues. It would cost-effective, fast and result-oriented.
There is no doubt about the concern pertaining to Haircuts involved in IBC referred cases for which a lot of churning of thoughts and models from international standards are getting in consideration by the IBBI & GOI.Even at the beginning of the Aug 2021, a parliamentary standing committee appointed to examine the workings of the Insolvency and Bankruptcy Code (IBC) has recommended an overhaul of the present system including a threshold rate of haircut for creditors below. It has also recommended a new supervisory body to oversee resolution professionals and suggested that only high court judges be appointed to the NCLT to ensure quicker disposal of cases.
On the consensus, the corporate matters are solved through the regulations of the case law. Experts claim that the process could endeavour a lifeline to the slumping avenues of MSMEs amidst the hard-bitten bearings of the Covid-19 pandemic.In last we can presume that in the impending time, the framework envisaged that it will going to cost-effective, fast and result-oriented.