MSME PRE-PACK

MSME PRE-PACK

Subject: Economy

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

Concept:

Pre-Packs:

• A pre-pack is an agreement for the resolution of the debt of a distressed company through an agreement between secured creditors and investors instead of a public bidding process.
• This system of insolvency proceedings has become an increasingly popular mechanism for insolvency resolution in the UK and Europe over the past decade.
• In India’s case, such a system would likely require that financial creditors agree on terms with potential investors and seek approval of the resolution plan from the National Company Law Tribunal (NCLT).

Need for Pre-Packs:

• Slow progress in the resolution of distressed companies has been one of the key issues raised by creditors regarding the Corporate Insolvency Resolution Process (CIRP) under the IBC.
• CIRP is the process of resolving the corporate insolvency of a corporate debtor in accordance with the provisions of the Code.
• Under the IBC, stakeholders are required to complete the CIRP within 330 days of the initiation of insolvency proceedings.

Key Features of Pre-Packs:

• Pre-Pack usually requires services of an insolvency practitioner to assist the stakeholders in the conduct of the process.
• The extent of authority of the practitioner varies across jurisdictions.
• Pre-pack envisages a consensual process – prior understanding among or approval by stakeholders about the course of action to address stress of a Corporate Debtor (CD), before invoking the formal part of the process.
• No requirement of Court Approval: It does not always require approval of a court. Wherever it requires approval, the courts often get guided by commercial wisdom of the parties.
• Outcome of the pre-pack process, where approved by the court, is binding on all stakeholders.