Introduction
The introduction of Pre-Packaged Insolvency Resolution Process (PPIRP) through the Insolvency and Bankruptcy Code (Amendment) Act, 2021, was greeted with considerable optimism among insolvency professionals, MSME advocates, and policy commentators. The framework, inserted as Chapter III-A of the IBC (Sections 54A to 54P), was designed to provide a faster, less disruptive, and more promoter-friendly path to insolvency resolution for micro, small, and medium enterprises whose aggregate default did not exceed one crore rupees. Drawing on the well-established concept of pre-packaged insolvency from the United Kingdom and the United States, it promised to allow promoters to negotiate a resolution with their principal lenders before formally entering insolvency, then use the NCLT process to bind holdout creditors and implement the agreed plan.
Four years on, the results are starkly disappointing. IBBI’s quarterly reports consistently show negligible uptake of PPIRP. The framework that was projected to bring thousands of distressed MSMEs into the formal resolution process, protecting employment and preserving going-concern value, has instead seen a handful of cases proceed through the mechanism. The vast majority of MSME insolvencies, where they enter the formal system at all, continue to be processed under the standard CIRP framework, with all its costs and delays, or are simply left to informal resolution outside the IBC altogether.
Understanding why the PPIRP has failed to gain traction is not merely an academic exercise. MSMEs are the backbone of Indian manufacturing and employment, and their financial distress, exacerbated by the COVID-19 pandemic and its aftermath, represents one of the most significant unresolved challenges in India’s financial ecosystem. A functioning pre-packaged framework would be a valuable tool. Its current non-functionality is a policy failure that demands examination.
Legal Framework
Chapter III-A of the IBC establishes PPIRP as a distinct process from the standard Corporate Insolvency Resolution Process (CIRP) under Chapter II. The key structural features of PPIRP are as follows.
First, eligibility is limited to corporate debtors that qualify as MSMEs under the MSME Development Act, 2006, and where the default does not exceed one crore rupees. This threshold aligns with the minimum default amount applicable to CIRP applications during the COVID suspension period, creating a coherent regulatory zone for small business defaults.
Second, a “base resolution plan” must be prepared by the corporate debtor’s existing management before PPIRP is initiated. This plan must be approved by unrelated creditors representing at least 66% of the financial debt. In other words, the promoter must negotiate and obtain creditor approval for a restructuring plan before the formal insolvency proceedings begin. The NCLT then appoints an insolvency professional, and if the base plan is accepted by the committee of creditors, it is implemented. If not, a Swiss challenge mechanism allows other resolution applicants to submit competing plans that must offer at least what the base plan offers to creditors.
Third, the statutory timeline for PPIRP is 90 days from the date of the NCLT’s order admitting the application, extendable by a further 90 days in specified circumstances. This compares favourably with the standard CIRP timeline of 180 days, extendable to 270 days and, in practice with litigation, often much longer.
Fourth, a moratorium under Section 54D applies during PPIRP, protecting the corporate debtor’s assets from proceedings by creditors, thereby providing the breathing space necessary for resolution implementation while being shorter in duration than the full CIRP moratorium.
The IBBI (Pre-Packaged Insolvency Resolution Process) Regulations, 2021, provide the detailed procedural framework for PPIRP, including the form and content of the base plan, the Swiss challenge mechanism, creditor committee formation, and the insolvency professional’s obligations during the process.
Judicial Developments
Because PPIRP uptake has been so limited, there is no substantial body of judicial precedent specifically on PPIRP. The few NCLT orders that have been passed in PPIRP cases have largely dealt with procedural questions of admission and interim measures rather than with substantive issues of plan approval or Swiss challenge mechanics. This itself is a data point: the absence of litigation in PPIRP cases is not evidence that the process is working smoothly, but rather that it is barely being used at all.
NCLT benches have in some instances shown uncertainty about the procedural requirements for PPIRP admission, particularly around the pre-admission creditor approval requirement and the sufficiency of the base resolution plan documentation. Some insolvency professionals report that NCLT benches that routinely handle standard CIRP cases sometimes approach PPIRP applications through the lens of CIRP requirements, creating additional compliance burdens that are not contemplated by the PPIRP regulations.
The broader judicial landscape for MSME insolvency, including the Supreme Court’s decisions on the MSME exemption under Section 240A and on the threshold for CIRP admission, provides contextual guidance that has influenced how PPIRP cases are handled procedurally, but there are no Supreme Court or NCLAT decisions specifically interpreting the PPIRP provisions.
Contemporary Issues and Analysis
The negligible uptake of PPIRP can be attributed to a cluster of structural barriers, each of which individually might be manageable but whose combined effect has been to make the process practically unattractive to the very constituency it was designed to serve.
The requirement that the promoter must obtain creditor approval for a base resolution plan before initiating PPIRP is conceptually sound: it ensures that there is a creditor-endorsed restructuring in place before the formal process begins. In practice, however, MSME promoters find it extremely difficult to negotiate such a plan with banks and NBFCs. The lending institutions have their own regulatory frameworks governing loan restructuring, and the Regulatory rationale for an individual loan officer or even a branch manager to endorse a haircut for an MSME borrower under the PPIRP framework is not straightforward. Bankers fear that approving a base plan outside the CIRP framework will expose them to regulatory scrutiny or audit objections, making them prefer the formal CIRP, which carries the imprimatur of an NCLT order and a committee of creditors approval.
Promoters, for their part, are deeply apprehensive about the insolvency label. Even though PPIRP is designed to be less disruptive than CIRP, it is still an insolvency proceeding and carries the reputational, contractual, and banking consequences associated with insolvency. MSME promoters frequently operate through networks of personal relationships where the stigma of insolvency, even in the formal, modern sense of the IBC, can be devastating to business relationships and trade credit. This stigma concern drives MSME distress into informal resolution channels, which are slower and less effective but do not carry the formal insolvency label.
Resolution professionals with experience in PPIRP are also extremely scarce. The IBC’s insolvency professional ecosystem has developed primarily around CIRP, and the skills and templates required for PPIRP (particularly for the base plan preparation, Swiss challenge management, and the hybrid role of working with existing management while protecting creditor interests) are substantially different from those required in a standard CIRP. The insolvency professional agencies have not yet developed adequate training or certification programmes specifically for PPIRP practitioners.
A further structural problem is that the one crore rupee default threshold limits PPIRP to very small enterprises. Many MSMEs that are in genuine financial distress have defaults far exceeding this threshold, placing them squarely in the CIRP framework regardless of their MSME status. The PPIRP framework therefore addresses only a narrow slice of MSME distress.
Comparative and International Perspective
The United Kingdom’s pre-pack administration framework, introduced under the Insolvency Act 1986 and refined through successive Statement of Insolvency Practice 16 (SIP 16) revisions and the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021, has seen substantial and growing use. Pre-pack administrations, in which a business and its assets are sold to a pre-identified buyer (often a connected party) immediately upon or shortly after the appointment of an administrator, account for a significant proportion of UK administrations. The volume reflects confidence in the mechanism, even if the use of connected-party pre-packs has attracted persistent criticism about value leakage.
The US Chapter 11 prepackaged bankruptcy is a highly developed technique used by large corporations as well as mid-market businesses. In a prepackaged Chapter 11, the debtor obtains creditor approval for a reorganisation plan before filing for bankruptcy protection, then files the plan simultaneously with the bankruptcy petition and seeks expedited confirmation. The process has been used extensively in the US energy, retail, and healthcare sectors, with some cases moving from filing to plan confirmation in under 30 days.
India’s PPIRP framework has the right intellectual lineage. The problem is that the market infrastructure, banking regulatory framework, and insolvency professional ecosystem that support pre-packaged processes in the UK and US do not yet exist in India, at least not in the MSME sector. Transplanting the legal structure without the supporting ecosystem has produced a framework that exists on paper but not in practice.
Practical and Policy Implications
The failure of PPIRP to gain traction has several practical consequences. MSMEs in financial distress continue to use informal resolution mechanisms, including promoter-negotiated settlements, asset sales outside insolvency, and simple default without resolution. These informal pathways often result in lower creditor recovery and more employment disruption than a structured insolvency process would produce. The IBC’s promise of value-maximising formal resolution has not reached the MSME segment.
Banks face a regulatory incentive problem: their internal procedures, as shaped by the Reserve Bank of India’s prudential norms and inspection frameworks, do not create a smooth path for pre-plan approval of MSME restructurings outside of the RBI’s own restructuring frameworks. The coordination required between IBC’s PPIRP framework and RBI’s regulated restructuring schemes has not been effectively bridged at a regulatory or operational level.
The COVID-19 pandemic, which was the proximate cause of the special attention given to MSME insolvency and was partly responsible for the enactment of PPIRP, has exacerbated MSME financial distress without creating the institutional capacity to handle that distress through PPIRP. A framework designed for pandemic-era MSME distress was not actually used during or after the pandemic.
Suggestions and Reforms
To revive PPIRP as a functional mechanism, a comprehensive set of reforms is required. First, the pre-application creditor approval requirement should be simplified. The current 66% threshold, which requires majority creditor endorsement before the formal process begins, effectively requires the promoter to close the restructuring deal before having any formal insolvency protections. A lower threshold (say, 51%) or a staged approach where the base plan can be submitted with support from the principal financial creditor alone, with a Swiss challenge available to other creditors within the formal process, would be more workable.
Second, RBI should issue a specific circular clarifying the regulatory treatment of base plan approvals by lenders under PPIRP, making clear that such approvals do not constitute irregular restructurings and do not attract asset classification or provisioning consequences beyond what the resolution plan itself provides. This regulatory clarity would remove the banker’s fear of approving a base plan.
Third, the default threshold for PPIRP should be raised substantially, to at least five crore rupees, to encompass a much larger segment of MSME distress. The current one crore rupee threshold is too low to cover the most significant MSME insolvency cases.
Fourth, IBBI and the insolvency professional agencies should develop a specialised PPIRP practitioner certification, with focused training on pre-packaged transactions, base plan preparation, and the governance requirements of PPIRP. A specialised cadre of PPIRP practitioners would build confidence in the process and develop the market knowledge to handle these cases efficiently.
Fifth, a time-bound government-sponsored programme to incentivise PPIRP uptake, analogous to the UK’s use of pre-pack administration reform as a policy tool, could demonstrate the framework’s viability and build the precedent base that would encourage further use.
Conclusion
The Pre-Packaged Insolvency Resolution Process was a thoughtful legislative innovation, designed to bridge the gap between informal MSME restructuring and the full rigour of CIRP. Its failure to gain traction in the four years since enactment is not evidence that the concept was wrong, but that the surrounding ecosystem of banking regulation, insolvency professional capacity, and market confidence has not been developed in a way that makes the framework functional.
Reviving PPIRP requires not just legal amendment but regulatory coordination between IBBI and RBI, sustained investment in insolvency professional training for MSME cases, and a genuine effort to reduce the stigma of formal insolvency proceedings for MSME promoters. Without these structural supports, the elegant legal architecture of Chapter III-A will remain, as it has been, largely decorative.
