Pre-pack Insolvency Resolution Process Regulations for MSMEs

Ashish M. Shaji

11 Jul, 2023

The Insolvency and Bankruptcy Board of India notified the regulations for the pre-packed insolvency resolution process and announced to provide a simple way of resolution of stressed MSMEs. These regulations have been notified to enable the operationalization of the pre-pack insolvency resolution process. This article will discuss this alternative insolvency resolution process for corporate persons classified as MSMEs.

Meaning of pre-pack insolvency resolution process

It is a quasi-formal procedure that has the essence of an out-of-court private restructuring and that of a formal bankruptcy. It’s a pre-planned insolvency procedure wherein a resolution plan is formulated and finalised before the initiation of formal proceedings.

An application to initiate a pre-packaged insolvency resolution process can be made in respect of a corporate debtor classified as MSME under sub-section (1) of section 7 of the MSMED Act 2006¹.

This resolution process is a settlement of the debt of a distressed company with the help of an agreement between the creditors and the investors. The creditors and investors mutually agree on the agreement and then seek the approval of NCLT on the resolution plan.

It is worth mentioning here that before the resolution plan is submitted to the NCLT, it should be approved by a minimum of 66% of creditors who are unrelated to the corporate debtor. It is up to the tribunal to either reject or accept the application for such insolvency proceedings before considering a petition for a CIRP.

How can the pre-pack insolvency resolution process be beneficial over CIRP?

In the past, the Corporate Insolvency Resolution process has come under criticism due to the 270 day threshold period. When compared with the CIRP, the pre-pack is limited to a maximum of 120 days, and 90 days shall be provided to the stakeholders to move the resolution plan to the NCLT.

In case of CIRP, the resolution professional takes over the control of the debtor as a representative of financial creditors, whereas in case of pre-packs, the existing management retains control. Experts believe that after the introduction of pre-packs, there will be minimal disruption to business and employment.

Objective of the pre-pack insolvency resolution process

The primary objective of introducing this resolution process is to give MSMEs the opportunity to restructure their liabilities and start afresh. It aims to safeguard the rights of the stakeholders and provides enough protection to avoid any sort of misuse by the firms to neglect making payment to the creditors. It shall also assist corporate debtors to go into consensual rebuilding with lenders and look after the entire risk side of the organization.

Provisions in the ordinance for creditors

The pre-pack insolvency resolution process brought in by the Central Government permits for a given resolution plan that specifies less than full recovery of dues for creditors, and if the creditors are not content with the resolution plan, they may seek resolution plans from a third party. Under this, any third party would be able to submit a resolution plan for a distressed company, and the original applicant may go ahead with the improved resolution plan or forego the investment.

Why MSMEs first?

A question would have gone across your mind why pre-packs have been introduced for MSMEs first? This is because they are critical for the Indian economy and their contribution to the country’s gross domestic product is significant besides providing employment to a sizeable population.

Moreover, MSMEs in India have suffered the most due to the Covid-19 pandemic. Also, with the threshold of a debt default at 1 crore rupees now under IBC, most of the MSMEs are out of this range.

Prospective and overriding effect of pre-pack insolvency resolution process

The disposal of the pre-pack application is given priority over the CIRP application for the stressed MSME under Sections 7, 9, and 10 of the IBC, subject to some conditions. However, in the case of pending CIRP applications, NCLT will have to dispose them of before considering the pre-pack application for debtors. Therefore the pre-pack application provisions are prospective and overriding.

Are all MSMEs eligible for the pre-pack insolvency resolution process?

 Most MSMEs would not be eligible for this under the IBC. It’s due to the fact that a corporate debtor should be registered as an MSME of the MSMED Act of 2006 to be eligible for the pre-pack process as specified in Chapter III-A of the ordinance.

According to the NSS 73^rd Round survey on MSMEs, there are 6.3 crore MSMEs in India. The MSME registration portal, Udyam Registration specifies that only 26.4 MSMEs are registered till date. When these figures are taken into consideration, the unregistered MSMEs are more than the registered MSMEs and thus can’t get the benefit under the PPIRP.

There is another restriction that limits MSMEs, PPIRP is restricted to the companies and LLPs. The sole proprietorship, partnerships, and HUF forms of MSMEs are not in frame of the aforementioned process, thereby restricting the eligible MSMEs for PPIRP.

Conclusion

As per experts, the pre-pack insolvency resolution process is considered expedient to deliver an efficient alternative insolvency resolution process for corporate persons classified as MSMEs under the IB Code 2016, thereby ensuring quicker, cost-effective, and value maximizing outcomes for stakeholders in a way that is least disruptive to the continuity of their businesses.

Read our article:Bank Audit 2021- Loans to MSME and Priority Sector

1. https://www.indiacode.nic.in/handle/123456789/2013?sam_handle=123456789/1362