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Resolution pre-packs for MSMEs

Date: 30 July 2021 Tags: Bills & Laws


The insolvency resolution mechanism for Micro, Small and Medium Enterprises (MSMEs) has proposed pre-packs under the new Insolvency and Bankruptcy Code (Amendment) Bill, 2021.



The bill will replace the ordinance that already existed i.e. the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021.



  • In pre-packs, instead of a public bidding process, debt of a distressed company will be resolved through an agreement between secured creditors, owners and outside creditors.

  • The form of insolvency method is popular outside India in countries such as United Kingdom and other European countries.

  • Financial creditors and promoters will have to approach National Company Law Tribunal (NCLT) with a new resolution plan under the pre-pack.

  • Before getting the approval for the plan from NCLAT, the approval of atleast 66 percent of the financial debtors not related to the debtor has to be obtained.

  • The rejection or approval of the plan by NCLAT is necessary if application for a pre-pack insolvency proceeding is to be considered.


Importance of pre-pack

  • The existing Corporate Insolvency Resolution Process (CIRP) is time consuming. This is because of large petitions filed by the erstwhile promoters and bidders.

  • In pre-pack, promoters and creditors will have a time limit of maximum of 120 days before they can bring a plan to NCLAT for resolution.

  • In pre-pack, the existing management takes control of the entity. In CIRP, a new resolution professional takes charge. This would have caused disruptions.


Reasons for introduction of pre-pack

  • It will help MSMEs to restructure their liabilities and start from a fresh point. It also ensures that system is not misused by entities to deny payment to creditors.

  • Pre-pack employs ‘Swiss challenge’ method to give opportunity to plans that can generate full recovery of dues.


Challenges for pre-packs

The management has to bring back the company from clutches of debts. The public stakeholders of company must not suffer due to non-payment of dues.

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