Lowering Thresholds, Easier Filings to Revive Pre-Packaged Insolvency Process for MSMEs: Officials

Revised Insolvency and Bankruptcy Code Set to Boost MSMEs' Out-of-Court Resolution Chances

The Insolvency and Bankruptcy Board of India's (IBBI) revised pre-packaged insolvency resolution process (PPIRP) is poised to significantly enhance the chances of out-of-court resolution for micro, small, and medium enterprises (MSMEs), according to experts and officials.

The revised draft regulations, released for comments on April 3, align with the newly introduced amendments to the Insolvency and Bankruptcy Code (IBC). This move is expected to make it easier for MSMEs to participate in the pre-packaged process. The PPIRP will ensure that the company remains in the hands of the same promoters who defaulted on loans, even during the ongoing resolution process.

Unlike the standard corporate insolvency resolution process (CIRP), where the management of the company is taken over by the resolution professional and the existing management board is suspended, the PPIRP follows a "debtor-in-possession" model. This means that the existing management stays in control of the day-to-day operations.

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The PPIRP is a specialized, fast-track insolvency framework introduced specifically for MSMEs. It combines the flexibility of out-of-court settlements with the legal binding force of a judicial order. The promoter prepares a plan to repay the debt, which is the "pre-packaged" part of the process – the deal is largely negotiated before going to court for final approval.

The revised regulations simplify the list of documents required to be furnished during the initiation of PPIRP. The applicant shall furnish such information as may be specified by the IBBI along with the application for initiation. The new regulations also do not make it mandatory for the MSME promoter to declare "avoidance transactions" at the stage of commencement of the PPIRP.

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Experts say these reforms are directionally positive and could improve PPIRP adoption among MSMEs by reducing friction in initiation, increasing lender confidence, and ensuring better implementation of resolution plans. However, a meaningful increase in PPIRP outcomes will depend on ecosystem factors such as creditor willingness, awareness among MSMEs, and stability in the regulatory framework.

The amendment to the pre-packaged regulations aims to substitute valuation standards of assets. They refine the definition of "fair value" of assets linking it to the estimated "realisable value" (that can be recovered by creditors). The IBBI has amended Regulation 38, requiring "two sets" of registered valuers instead of just two individuals. This ensures each asset class has a dedicated expert for more precise valuations.

While the amended regulations strengthen the valuation framework to ensure better value realisation for creditors, the increased compliance burden such as the cost of hiring multiple sets of valuers may offset the intended cost effectiveness of the process for MSMEs.