Pre-packs for MSMEs: FM introduces Insolvency amendment Bill in LS

Our Bureau New Delhi | Updated on July 26, 2021

Finance Minister Nirmala Sitharaman speaks in the Lok Sabha during the Monsoon Session of Parliament, in New Delhi, on Monday   -  PTI

Bill to replace Ordinance that was issued in April this year

The Finance Minister Nirmala Sitharaman on Monday introduced a Bill in the Lok Sabha 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 would replace an ordinance that Centre had promulgated in April this year for introduction of pre-packaged insolvency for MSMEs.

Currently, India 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.

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

Also read: Pre-packs for MSMEs: FM likely to introduce Insolvency Amendment Bill in LS on July 26

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 up to NCLT admission, followed by the existing NCLT supervised process for resolution as specified under the Insolvency and Bankruptcy Code (IBC).

Viable alternative

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 had 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.

Debt default threshold

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.

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 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 Resolution Professional comes in and takes over on the day of the admission itself.

Published on July 26, 2021

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