Centre issues ordinance to introduce pre-packaged insolvency for corporates classified as MSMEs
In the Indian framework context, a pre-packaged insolvency is an arrangement where the resolution of a company’s business is negotiated with a buyer before an insolvency professional’s appointment. 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).
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 has deemed it fit first to introduce pre-packs for MSMEs as they are critical for India’s economy, and they contribute significantly to the country’s gross domestic product besides employing a sizeable population. Also, MSMEs in India have relatively suffered most during the current pandemic times. Also, with the threshold of debt default at ₹ 1 crore now under IBC, most of the MSMEs are out of this range. Therefore normal Corporate Insolvency Resolution Process (CIRP) is out of the reach of most MSMEs. To address these issues, the Centre has introduced a pre-pack for MSMEs through a unique model that is different from normal CIRP.
In the coming days, 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 of 120 days from the pre-packaged insolvency commencement date 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 ways from the normal CIRP. Unlike CIRP, this pre-pack framework for MSMEs will be a debtor in possession and creditor in the control model. In the case of normal CIRP, it was a resolution professional in possession and a 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 an 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 a lot of flexibility to existing promoters of MSMEs, according to Sahoo.
The government move to introduce pre-packs for MSMEs does not mean that a similar concept will not be rolled out for other corporates. It is possible that this would be introduced for other corporates as well in days to come depending on the learnings from the experiment done for MSMEs, sources said.