Allowance of Pre-packs, by Amending the Insolvency Law



A new plan has been introduced by the Government of India, which is the Pre-packaged Resolution Process by amending the Insolvency Law. This law will provide a quicker and value-maximizing outcome for stressed Small and Medium Enterprises (MSMEs). Under the Insolvency and the Bankruptcy Code, 2016, the MSMEs can follow the resolution for their stress through the pre-packaged process. As we all know, many MSMEs have been under the impact of COVID-19, experts have observed that the latest amendment, which comes in less than two weeks after suspending the IBC provisions, is considered a welcome move.


During the pandemic, which was disrupting economic activities, the suspension took place where it was not allowed to start the fresh insolvency proceedings. It was urgently required to address the special requirements of MSMEs relating to the resolution of their insolvency, as the pre-packaged resolution process was introduced, usually under this process the main stakeholders like creditors and shareholders come together to analyse a prospective buyer, and sort out a resolution plan before submitting the plan to the National Company Law Tribunal for the formal approval, as it is necessary to get this approval if the resolution plans are under the IBC. Providing an effective alternative, insolvency resolution for MSMEs is considered as convenient as it ensures quicker, cost-effective, and value-maximizing outcomes for all the stakeholders, which is least disruptive, and also helps preserve jobs.


To achieve these objectives, it will be advantageous to introduce a Pre-packaged Insolvency Resolution Process for people of the corporate world, which is classified as micro, small and medium enterprises. The ordinance makes the pre-packaged route to be genuine, and viable cases, which ensures the least business disruption. While the approach of debtor-in-possession vests its significant consent rights to the financial creditors so that the errant promoters cannot misuse the mechanism. It was noted by Majumdar that adopting the evaluation process was similar to the Swiss Challenge, which retains competitive tension such as the promoters come up with the plan with the least impairment to rights and claims of creditors. As said by L Viswanathan Partner at Cyril Amarchand Mangaldas that the government has carefully introduced the pre-pack rule only for the MSME sector. It was said by Rajiv Chandak, partner at Deloitte India, that the introduction of the pre-pack framework was likely to coincide with lifting the ban on filing new cases of insolvency. Currently, the pre-pack provisions have been restricted by the government and will extend to other corporations in some time.


The pre-pack rule includes the procedure of checks and balances which consists of applicability of Section 29A and two-thirds creditor’s approval for the initiation and the confirmation of the base resolution plan. Broadly, Section 29 of the IBC, prevents defaulting promoters from taking a step back, and from trying to take back their companies under the resolution process. Section 7, 9 and 10 of the IBC deal with the initiation of the corporate insolvency resolution process by a financial creditor, operational creditor, and corporate debtor, which were suspended to provide relief for the companies hit by the pandemic. Chapter III-A has also been inserted that deals with the insolvency resolution process. It has also been said that in respect of a corporate debtor, an application for commencing a Pre-packaged Insolvency Resolution Process should be kept in mind.


The ban shall be available from the pre-pack commencement date till the termination of the process. During the PIRP, the corporate debtor must remain under the control and possession of the current promoters and management. If the committee of creditors by a vote of 66% have vested the management of the corporate debtor with the resolution professional, it feels like the affairs of the corporate debtor are being organised dishonestly, and have applied to the confirmation of the same before the authority. It is required to submit the resolution plan to the adjudicating authority within 90 days of the commencement date. It is also required to invite the resolution applicants for the plan in the event the base resolution plan is not approved by the CoC or claims owed by the operational creditor.


The creditors and debtors are given an allowance by the PIRP, to work on an informal plan and then submit it for approval. This deal is kind of a restructuring plan which is usually agreed upon by the debtor and its creditor before the insolvency filing and then sanctioned by the authority on an expedited basis. The control on the existing management is retained until the final agreement is agreed upon. The aim of the informality of the pre-pack plan is the faster resolution of the distressed firms. In comparison with the Corporate Insolvency Resolution Process (CIRP), PIRP has the advantage of being a more informal process, and the possibility of closure in a shorter period. In the overall process, it helps to cut down the time and costs. Hence, value-maximizing outcomes for all the stakeholders.



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