Who Can Apply for Pre-Packaged Insolvency Resolution Process (PIRP)?

The Pre-Packaged Insolvency Resolution Process (PIRP) is an efficient and streamlined method under the Insolvency and Bankruptcy Code (IBC) aimed at resolving the financial distress of businesses. Unlike the regular Corporate Insolvency Resolution Process (CIRP), PIRP allows for a pre-negotiated resolution plan that is ready before the formal insolvency process begins. However, not all companies can apply for PIRP; there are specific eligibility criteria and conditions that must be met.

Who Can Apply for PIRP?

The Pre-Packaged Insolvency Resolution Process (PIRP) is primarily designed for small businesses or distressed companies with manageable debt that can be resolved swiftly through an agreed-upon resolution plan. Below are the key parties that can initiate the process, along with the eligibility criteria.

1. Corporate Debtor (The Company or Business)

A corporate debtor (the company in financial distress) can apply for PIRP under the following conditions:

• MSMEs and Small Companies: PIRP is primarily aimed at small businesses or Micro, Small, and Medium Enterprises (MSMEs), as these companies typically face fewer complexities and can benefit from a quicker resolution process. A company needs to qualify as a small company under the Companies Act, 2013 to be eligible.
• Debt Threshold: The debtor’s outstanding debt must be ₹1 crore or less. This makes PIRP particularly suitable for small and medium-sized enterprises (SMEs) that have manageable debts and can be resolved quickly through restructuring or repayment.
• Insolvency or Financial Distress: The company must be in financial distress and facing insolvency issues. However, the company should not yet have been liquidated or be under liquidation proceedings.
• Voluntary Initiation: The application for PIRP is voluntary, meaning the debtor (corporate debtor) must apply to the National Company Law Tribunal (NCLT) for initiating PIRP. It is not mandatory for the debtor, but it is an option if they want to resolve insolvency quickly.

2. Creditors (Financial and Operational Creditors)

Creditors can also play a role in initiating PIRP, although the process is initiated by the debtor. Here's how creditors are involved:

Creditors' Role in Pre-Packaging

Financial creditors and operational creditors are involved early in the PIRP process to agree on a resolution plan. Before applying to the NCLT, the corporate debtor must have a pre-packaged resolution plan that is agreed upon by the creditors.

Agreement of Creditors

If creditors are on board with the pre-packaged plan, they give their approval. The creditors' approval is required before the debtor submits the application for PIRP to the NCLT. This ensures that the creditors are aligned with the plan from the outset, making the entire process faster and smoother.

Threshold for Support

A majority of creditors (typically 75% of financial creditors by value) must approve the resolution plan before the application is made to NCLT. Once creditors agree, they become part of the process to oversee the implementation of the plan.

3. Insolvency Professional (IP)

An Insolvency Professional (IP) is appointed to oversee the PIRP process. The IP is crucial for managing the process, ensuring that the pre-packaged plan is followed, and ensuring compliance with the Insolvency and Bankruptcy Code (IBC). The IP plays the following roles:

• Facilitating the Process: The IP helps negotiate the pre-packaged resolution plan between the debtor and creditors before initiating the PIRP.
• Filing with NCLT: Once the resolution plan is prepared and approved by creditors, the IP helps file the application with the National Company Law Tribunal (NCLT) for initiation of the PIRP.

Conditions for Applying for PIRP

The debtor and its creditors need to meet specific conditions to initiate PIRP:

Pre-Negotiated Resolution Plan

The company must have a pre-negotiated resolution plan that is agreed upon by the creditors. This plan must outline how the company intends to restructure its debt, repay creditors, and continue operations.

Application to NCLT

After obtaining creditor approval for the resolution plan, the corporate debtor applies to the NCLT to initiate PIRP. The application should include the pre-packaged resolution plan, along with other necessary documents and declarations.

Creditors' Agreement

The creditors, both financial and operational, must agree to the plan before the debtor can proceed with the formal application to NCLT. Their consent is critical to initiating the process.

No Existing Liquidation Proceedings

The company must not be undergoing liquidation at the time of applying for PIRP. PIRP is meant to be a restructuring mechanism, not a means to initiate liquidation.

Restrictions on Eligibility for PIRP

Although PIRP offers a quicker and less complex insolvency resolution process, not all companies are eligible for it. Some restrictions include:

• Large Companies with Debt Above ₹1 Crore: Companies with outstanding debts greater than ₹1 crore are not eligible for PIRP and must undergo the regular Corporate Insolvency Resolution Process (CIRP).
• Companies in Liquidation: PIRP cannot be initiated if the company is already in the process of liquidation under the IBC. The company must not have already started liquidation proceedings before applying for PIRP.
• Companies Not Complying with IBC: Companies that have violated the Insolvency and Bankruptcy Code (IBC) or have not complied with previous restructuring efforts may not be eligible for PIRP.

Example of Who Can Apply for PIRP

Let’s consider ABC Ltd., a small manufacturing company facing financial distress due to declining sales and debt repayment issues:

Eligibility for PIRP

ABC Ltd. has debts of ₹85 lakh, which is within the ₹1 crore debt threshold. The company qualifies as a small company under the Companies Act, and its debts are manageable.

Pre-Packaged Plan Development

The company negotiates with its financial creditors (banks and suppliers) and agrees to a debt restructuring plan that includes part of the debt being written off and the rest restructured with more favorable terms.

Initiating PIRP

Once the creditors approve the resolution plan, ABC Ltd. submits an application to the NCLT to initiate PIRP, with the pre-packaged plan attached.

NCLT Approval

The NCLT reviews the application and, after confirming the creditors’ approval, approves the PIRP.

Resolution Process

ABC Ltd. undergoes debt restructuring under the terms of the pre-packaged plan, helping it avoid liquidation and continue operations.

Conclusion

The Pre-Packaged Insolvency Resolution Process (PIRP) allows companies with manageable debts to resolve insolvency quickly and efficiently, particularly for small businesses, MSMEs, and companies with debts of ₹1 crore or less. The process is voluntary, and both the corporate debtor and creditors must agree on a pre-negotiated resolution plan before initiating PIRP. This makes it a suitable option for companies looking to restructure their debts in a faster and less costly manner compared to the traditional CIRP.