Finance Minister Nirmala Sitharaman is likely to introduce a Bill in Lok Sabha on Monday to provide statutory backing to pre-packaged insolvency resolution process (pre-pack) regime for companies classified as micro, small and medium enterprises (MSMEs).

This Bill – Insolvency and Bankruptcy Code (amendment ) Bill 2021– once passed by Parliament will replace an ordinance that the Centre had promulgated in April this year for the introduction of pre-packaged insolvency for MSMEs.

India has about 6-7 lakh companies that are classified as MSMEs, and theycould benefit from the newly introduced pre-packaged insolvency framework.

The objective of introducing pre-pack for MSMEs is that it is a cost-effective mechanism and quickens the process for resolution of MSMEs.

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).

Pre-packs are seen to be a viable alternative to the current corporate insolvency process, and will be significantly less time-consuming and inexpensive against the formal insolvency proceedings.

MSMEs first

The government had deemed it fit to first introduce pre-packs for MSMEs as they are critical for India’s economy and contribute significantly to the country’s gross domestic product, besides providing employment to a sizeable population.

Also, MSMEs have relatively suffered most during the current pandemic times, and with threshold of debt default at ₹1 crore now under IBC, most of them are out of this range.

The Centre has notified at ₹10 lakh the minimum debt default threshold for MSMEs for which pre-packaged insolvency resolution process could be used. The ordinance specifies maximum time period of 120 days from the pre-packaged insolvency commencement date by when the pre-pack process should be completed.

Debtor in possession model

The framework introduced through the ordinance was an experiment of sorts and different in some ways from the normal Corporate Insolvency Resolution Process (CIRP). Unlike CIRP, this pre-pack framework for MSMEs is a debtor in possession and creditor in control model.

In the case of normal CIRP, it was the resolution professional in possession and creditor in control. In the pre-pack for MSMEs, the debtor will continue to control and run the enterprise till resolution happens. In normal CIRP, the Resolution Professional comes in and takes over on the day of the admission itself.

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