Now, a pre-packaged insolvency process for 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).

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.

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 would be significantly less time-consuming and inexpensive as against the formal insolvency proceedings.

MSMEs first

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 sizeable 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 Centre is expected to in coming days notify the 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 is an experiment of sorts and different in some ways from the normal CIRP. Unlike CIRP, this pre-pack framework for MSMEs will be a debtor in possession and creditor in control model. In the case of normal CIRP, it was resolution professional in possession and creditor in control. Put simply, in the pre-pack for MSMEs, the debtor will continue to control and run the enterprise till resolution happens. In normal CIRP, the RP comes in and takes over on the day of the admission itself.

Speaking to BusinessLine on the Centre’s move to issue ordinance, M.S.Sahoo, Chairperson, Insolvency and Bankruptcy Board of India (IBBI) said the objective of introducing pre-pack for MSMEs is that it is a cost effective mechanism and quickens the process for resolution of MSMEs.  The pre-pack for MSMEs are based on debtor in possession model unlike the normal CIRP where it is RP in possession. This will give lot of flexibility to existing promoters of MSMEs, according to Sahoo.

Experts' take

Soumitra Majumdar, Partner, J Sagar Associates, said  “As with any legislation, this Ordinance will also need to evolve, as it goes along to address implementation issues which will arise. Illustratively, the payment/ restructuring terms to dissenting creditors may have to be dealt with soon, especially in light of the recent Supreme Court judgement”..

Rajiv Chandak, Partner, Deloitte India, said that currently government has restricted Prepacks provisions for MSME and will extend to other Corporates in sometime. Prepacks will help Corporate Debtors to enter into consensual restructuring with lenders and address entire liability side of the Company. Government needs to further augment the NCLT’s infrastructure so that prepacks can be implemented in time bound manner. Government may consider setting up specific benches looking at Prepack and Insolvency above certain size to expedite resolution of large cases in timebound manner”

Harish Kumar, Partner, L&L Partners, said: "Considering the significant contribution of MSMEs to India’s GDP, the Government has actually been working on this Pre-Packed Insolvency Framework for quite some time. This newly introduced framework for MSMEs, inter alia. providing for quicker & cost effective resolution and permitting debtor to be in control, may fairly be expected to further strengthening both the financial and operational position of MSMEs, importantly under prevailing Covid crises”.

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