Debt restructuring is a process wherein a company or an entity experiencing financial distress and liquidity problems refinances its existing debt obligations in order to gain more flexibility in the short term and make their debt load more manageable overall.
Debt restructuring by the business entities is done to prevent going into defaulters list on their existing debts. This procedure is beneficial when the business is experiencing a cash crunch due to various extraneous factors which have hampered the ability to service its debt obligations. Under such circumstances, the corporates have options – debt restructuring or bankruptcy. Bankruptcy is evidently no one’s first choice and immediate steps are required to prevent extinction.
MSMEs in particular are most vulnerable to financial shocks for the reason being difficulty in accessing finance in the right quantity at the right time. Additionally, emergence of the second wave of COVID-19 was unexpected, for which the MSME sector was ill-prepared, having hardly recovered from the blow of the first wave of pandemic. MSMEs in India have relatively suffered the most during the current pandemic times and the problem of delayed payment remains one of the biggest challenges to these MSMEs. To combat with this unpredicted low fall in the economy and to save MSMEs from getting extinct ,one of the initiatives by the Government is introduction of Pre-packaged Insolvency Resolution Process (herein referred as PPIRP) under the Insolvency and Bankruptcy Code for default made from a range of Rs. 10 lakhs to 1 crore by the MSME Sector. It is introduced considering the urgency to provide an alternative resolution framework for pandemic affected MSME. It has become effective from 04.04.2021 under the Insolvency and Bankruptcy Code.
HOW PPIRP IS USEFUL TO MSME?
- Empowers Corporates – The PPIRP is the process which can be initiated by the Corporate MSMEs themselves. Unlike CIRP, PPIRP empowers a Corporate Debtor to resolve the defaults above 10 lakhs while making an application with approval of its Financial Creditors.
- Management of affairs – The affairs of the company are managed by the promoters and directors themselves and the control remains with the management of the Company. This is implemented with the base idea that the promoters of the company are best decision makers w.r.t. their business.
- Minimum default amount – The default amount is minimum to ease the process of debt rectification by the MSME Corporates.
- Mutual Participation – The PPIRP is a resolution process hybrid in nature that includes both; the essence of negotiations between the Creditor and Debtors as well as the approval of Adjudicating Authority for the Resolution Plan.
- Least complexity – It provides the opportunity to the promoters of MSME to draw a base plan after negotiations with its creditors. The steps taken for resolution are executed at a prior stage before reaching the Adjudicating Authority and hence less cumbersome.
- Time period – It is in many ways more beneficial in nature as it is cost effective and time saving i.e. the time limit for approval of a resolution plan under PPIRP is 120 days.
- Least judicial interference – There is less judicial interference by the Adjudicating Authority and even after the commencement of PPIRP, the management and functioning of the company remains in the hands of the Corporate Debtor.
- Priority – If MSME is undergoing PPIRP, Financial Creditor or Operational creditor cannot file CIRP against that MSME. PPIRP gets priority if an application is filed within 14 days of filing application for CIRPs but PPIRP cannot be filed if CIRP has already commenced against a corporate debtor (section 11A(4)).
Therefore, it takes negotiation skills to restructure the existing debts and to maximize the value of the Company in the least disruptive way possible.
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