Abstract
The Insolvency and Bankruptcy Code, 2016 (IBC) revolutionized India’s insolvency regime by shifting from debtor-in-possession to creditor-in-control. The Pre-Packaged Insolvency Resolution Process (PPIRP), introduced in 2021 for MSMEs, promised faster resolution, lower costs, and management continuity. However, nearly five years into implementation, fewer than 50 PPIRP cases have been resolved compared to thousands under CIRP, signalling underlying structural and operational deficiencies. This study critically examines PPIRP with special reference to creditor control dynamics and corporate acquisition risks. Through doctrinal legal research analyzing statutes, regulations, case law, and policy documents, the paper addresses three core questions: How does creditor control operate under PPIRP? What dynamics and regulatory gaps characterize corporate acquisitions through pre-packs? What structural impediments plague the regime, and what reforms are necessary? The findings reveal that creditor control remains structurally skewed. The Committee of Creditors excludes operational creditors—suppliers, vendors, and employees holding significant MSME trade credit—while public sector banks wield disproportionate influence, creating institutional bias. Corporate acquisitions through PPIRP present unique risks: incumbent management participation enables entrenchment, Section 29A disqualifications are circumvented during pre-negotiation, and Competition Commission of India oversight remains ambiguous. Interim finance protections are inadequate, and information asymmetry between creditor classes undermines informed decision-making.The study concludes that realizing PPIRP’s promise requires multi-pronged reforms: enhancing operational creditor participation, closing Section 29A loopholes, strengthening interim finance protections, building insolvency professional capacity, mandating pre-negotiation disclosure, and aligning with UNCITRAL Legislative Guide and World Bank Principles. Only through such reforms can India achieve an equitable, transparent, and efficient pre-pack framework for MSME rescue.
Keywords: Pre-Packaged Insolvency, Creditor Control, Corporate Acquisitions, IBC 2016, MSME Resolution
1.INTRODUCTION
India’s journey toward modern insolvency law has been long and fraught with institutional failure. For nearly two decades, the Sick Industrial Companies Act, 1985 (SICA) dominated the landscape, but its focus on industrial revival rather than creditor recovery, coupled with overburdened tribunals, rendered it largely ineffective. Successive attempts at reform—through the SARFAESI Act of 2002, the Recovery of Debts and Bankruptcy Act of 1993, and the try-out mechanismfailed to address the core problem i.e. the average time to resolve insolvency in India exceeded three years and recovery rates hovered around 26 percent.
The Insolvency and Bankruptcy Code, 2016 (IBC) marked a paradigm shift. Designed around time-bound resolution, creditor control, and a clear hierarchy of payouts, the IBC transformed insolvency from a debtor-in-possession framework to a creditor-in-control model. The Supreme Court in Swiss Ribbons Pvt. Ltd. v. Union of India upheld the constitutional validity of the IBC, emphasizing its objective of balancing the interests of all stakeholders while prioritizing resolution over liquidation. Yet, even as the IBC succeeded in reducing resolution timelines for large corporates, MSMEs continued to languish under the conventional Corporate Insolvency Resolution Process (CIRP), which demanded resources and expertise beyond their capacity.
Recognizing these gaps, the Ministry of Corporate Affairs constituted a Sub-Committee of the Insolvency Law Committee in 2020 to examine pre-packaged insolvency mechanisms. Pre-packs, as practiced in the United States (Chapter 11) and the United Kingdom, allow debtors and creditors to negotiate a resolution plan before filing for insolvency, with court approval following swiftly thereafter.[1] This hybrid model combines the efficiency of out-of-court settlements with the finality and enforceability of formal insolvency proceedings.
The Insolvency and Bankruptcy Board of India (IBBI) introduced the Pre-Packaged Insolvency Resolution Process (PPIRP) through Regulations in 2021, specifically tailored for MSMEs. The legislative design rests on three pillars: (i) initiation through a base resolution plan negotiated between the corporate debtor and financial creditors; (ii) continued management oversight during the process, unlike the complete displacement under CIRP; and (iii) a condensed timeline of 90 days, extendable by 60 days. The rationale is clear—reduce costs, preserve enterprise value, and enable faster Clearance of stressed MSMEs without the disruption of full CIRP.
[1] Himani Singh, Pre-Packaged Insolvency in India: Lessons from USA and UK (Jan. 13, 2020) .