The point of immense significance is attached to the fact that the Centre has issued an ordinance with an objective to introduce Pre-packaged insolvency for the corporates classified as Micro Small and Medium Enterprises (MSMEs). The current statistics regarding India points to the fact that there are around 6-7 lakh companies classified as MSMEs and it is considered that potentially these many companies could benefit from the newly introduced pre-packaged insolvency framework.
What exactly is a pre-packaged insolvency arrangement?
Fundamentally, it is an arrangement wherein the resolution of a particular company’s business is negotiated with a buyer before the appointment of an insolvency professional. It is basically a mixture of formal as well as informal mechanisms, with the informal process extending up to NCLT admission, followed by the existing NCLT monitored process for the resolution as specified under Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as ‘IBC’). It is at the same time important to take note that the pre-packs are effectively seen as a viable alternative to the current sphere of corporate insolvency process as they are less time consuming and inexpensive and maximizes the outcomes for all the stakeholders in contrary to the formal insolvency proceedings. The pre-packaged, informal, hybrid, and debtor-driven pre-insolvency process called pre-pack will operate under the IBC and is essentially used in overseas jurisdictions like the U.K., U.S. & Singapore. In simple words, it is a kind of restructuring that the borrower is allowed to benefit from with the approval of the creditors, without having to go with the lengthy as well as the expensive process of IBC. Most importantly, the borrower can retain the management control till a resolution is arrived at.
The intention behind introducing Pre-pack for MSMEs
The Government ordinance stated that the MSMEs are critical for India’s economy as they contribute significantly to the gross domestic product and provides employment to a sizeable population. Therefore, there arises a need to urgently address the specific requirements pertaining to MSMEs with respect to the resolution of their insolvency, owing to the unique nature of the business and relatively simpler corporate structures.
A win-win for the trio; NCLT, Borrower, and the Creditors
For the NCLT, this efficiency is a welcome move because of the fact that the burden of NCLT would be reduced because the NCLT is already burdened with a large number of cases of IBC which hampers the NCLT infrastructure and which also is deviating from its objective of speedy resolution and hence through the pre-packed move the burden of NCLT can be reduced to a great extent and NCLT would be certainly happy to agree with the process.
For the borrower, it makes significant sense because the MSME borrower retains control of the enterprise unless a settlement is reached at which increases his chance to regain control of the company through a resolution process or by getting an investor on Board. In a typical IBC process, the role of the borrowers ceases to exist once the case is admitted to the court of NCLT.
For lenders, it is certainly good news as the resolution process would get completed within 120 days from the commencement date thus, relieving them from any hassles and tensions. This concept is essentially new for India however, it is common for the countries like the UK and the US the time will test the efficacy of this process in India.
Dinesh Unnikrishnan, Explained: Why pre-packaged insolvency resolution is great for MSME borrowers, April 5, 2021, THE MONEY CONTROL. Available at: https://www.moneycontrol.com/news/business/explained-why-pre-packaged-insolvency-resolution-is-great-for-msme-borrowers-6729901.html
K.R. Srivats, Now, a pre-packaged insolvency process for MSME, April 5, 2021, THE HINDU. Available at: https://www.thehindubusinessline.com/companies/msme/now-in-india-a-pre-packaged-insolvency-process-for-msmes/article34242211.ece