PRE-PACKAGED INSOLVENCY RESOLUTION PROCESS FOR COMPANIES CLASSIFIED AS MICRO, SMALL AND MEDIUM ENTERPRISES (MSMES).

The Centre has used the Ordinance route to introduce pre-packaged insolvency resolution process (pre-pack) for companies classified as micro, small and medium enterprises (MSMEs) via the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021.

This amendment will facilitate creditors and debtors to work on an informal plan and then submit it for approval. A pre-packaged insolvency — in the Indian framework context— is an arrangement where the resolution of a company’s business is negotiated with a buyer before the appointment of an insolvency professional. It is a blend of informal and formal mechanisms, with the informal process stretching upto NCLT admission, followed by the existing NCLT supervised process for resolution as specified under the Insolvency and Bankruptcy Code (IBC).

The incumbent management typically retains control until the final agreement is agreed upon. The informality of the process is aimed at a faster resolution of distressed firms. Compared to a regular corporate insolvency resolution process (CIRP) under the IBC, pre-packs have the advantage of being a more informal process and the possibility of closure in a shorter period of time. It was considered expedient to provide an efficient alternative insolvency resolution process for corporate persons classified as micro, small and medium enterprises under the Insolvency and Bankruptcy Code, 2016, ensuring quicker, cost-effective, and value-maximizing outcomes for all the stakeholders, in a manner that is least disruptive to the continuity of their businesses and which preserves jobs.

A separate chapter, Chapter IIIA, has been inserted in the principal Act to deal with the pre-packaged insolvency resolution process. The pre-packaged insolvency resolution process shall be completed within a period of one hundred and twenty days from the pre-packaged insolvency commencement date. The moratorium shall be available from the pre-pack commencement date till the closure of the process, whether by approval of the resolution plan or otherwise. The corporate debtor shall remain under the control and possession of the current promoters and management during the pre-pack process.

India currently has about 6-7 lakh companies that are classified as MSMEs and potentially these many could benefit from the newly introduced pre-packaged insolvency framework. Pre-packs are seen to be a viable alternative to the current corporate insolvency process and would be significantly less time-consuming and inexpensive as against the formal insolvency proceedings.The government has deemed it fit to first introduce pre-packs for MSMEs as they are critical for India’s economy and they contribute significantly for the country’s gross domestic product besides providing employment to a size able population. Also, MSMEs in India have relatively suffered most during the current pandemic times. Also, with threshold of debt default at ? 1 crore now under IBC, most of the MSMEs are out of this range.The Center is expected to in coming days notify the debt default threshold for MSMEs for which pre-packaged insolvency resolution process could be used.