Pre-pack insolvency for MSMEs now a reality

KR Srivats New Delhi | Updated on April 05, 2021

Centre issues Ordinance; debt default threshold to be notified

The Centre has taken the Ordinance route to introduce pre-packaged insolvency resolution process (pre-pack) for companies classified as micro, small and medium enterprises (MSMEs).

India has 6-7 lakh companies that are classified as MSMEs, which could potentially 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 up to NCLT admission, followed by an existing NCLT supervised process for resolution, as specified under the Insolvency and Bankruptcy Code (IBC).

Less time-consuming

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 the country’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 pandemic times. Also with threshold of debt default at ₹1 crore now under IBC, most of the MSMEs are out of this range.

Debtor in possession model

The Centre is expected to notify the debt default threshold for MSMEs for which pre-packaged insolvency resolution process could be used.

The ordinance specifies a 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 is an experiment of sorts and different in some ways from the normal CIRP (Corporate Insolvency Resolution Process). 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, MS 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.

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 Prepack 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.

Published on April 05, 2021

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