Pre-packaged resolution for MSMEs yet to unwrap success

Bankers are reluctant to take any MSME through the process anticipating a deep haircut while promoters of MSMEs do not want to risk losing their company to a third party. The government, meanwhile, is considering a similar process for larger companies as delays in cases are seen as potentially diminishing the appeal of the Insolvency and Bankruptcy Code (IBC).

“There are no takers for this scheme because banks prefer a one-time settlement (OTS) in such cases and they are quicker to implement,” said a senior banking executive. “This scheme is, in fact, similar to an OTS because the creditor and the bank have to agree to the plan, but the big difference is that in the PPIRP, we need a court approval that takes its own time.”

In 2021, the Centre passed an ordinance allowing pre-packs as an insolvency resolution mechanism for MSMEs with defaults up to ₹1 crore. PPIRP allows creditors and debtors to work on a resolution plan and then submit it for approval from the courts. The incumbent management typically retains control until the final deal is approved by the court.

Bahram Vakil, founding partner at AZB & Partners and member of the bankruptcy law reform committee that led to the implementation of the IBC, said the scheme did not work because, for such small outstanding loans, the OTS is much simpler than going to court.

“Typically, in these small loans there are only one or two lenders and not a consortium of lenders; so going to court just delays the process. We hope that the new amendments suggested can open it up to larger companies,” Vakil said. “This will be beneficial because if creditors and the debtor agree, then we only need a court okay at the end and not at every stage, quickening the process substantially.”

Another banker said banks are reluctant to get into any agreement with borrowers with no chance of full recovery. “These companies are small where there are a lot of issues. If banks allow these promoters to escape with a haircut, there will be a flood of such requests, creating asset quality challenges. Smaller banks waited for large ones to finalise some sort of a process but that did not happen; so everyone just wants the status quo,” this banker said.

Vakil said the PPIRP process stipulates that in cases where operational creditors are not getting paid fully, a Swiss challenge be opened to ensure the best value. “This stipulation will also be a part of the amended law because we cannot have a sweetheart deal between banks and debtors. We are hopeful that this amendment will be taken up in the monsoon session of parliament,” he said.

Bankers said small companies were also not equipped to approach banks with a clear plan, which was another reason for its failure.

“The scheme depended a lot on small companies to initiate the process, which involved the filing of techno-economic viability study that not all could do. Ultimately, it is for the company to prove that it is eligible and willing to undergo the process of resolution, which was also an issue,” said another bank executive.