Insolvency and Bankruptcy Code: Pre-pack mechanism initially to be limited to MSME resolution

The government is planning to initially roll out pre-packs as a resolution mechanism under the Insolvency and Bankruptcy Code (IBC) only for micro, small, and medium enterprises (MSMEs), according to officials aware of development. The Centre had previously announced a special resolution framework for MSMEs; however, similarities between the special framework and pre-packs, which the government was also considering to introduce, led to both the proposals being clubbed, according to officials.

Pre-packs allow for the management of a distressed firm to retain control while creditors negotiate a resolution plan with either existing promoters or a third party. Currently, the Corporate Insolvency Resolution Process (CIRP) requires creditors to take control of the management of a distressed company through an insolvency professional and a public bidding process to maximise the value of the assets of the distressed firm.

An official said that both schemes had been clubbed together, since the “broad features were the same,” noting that there wasn’t any concrete timeline on when the scheme would be introduced.

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The pre-pack scheme is aimed at quicker insolvency resolution with a timeline of 90 days for the submission of a resolution plan and 30 days for approval by adjudicating authority. At the end of September 2020, 74 per cent of ongoing insolvency proceedings had crossed the 270-day mark.

Pre packs are currently in use in a number of developed jurisdictions including the US and the UK but have however faced criticisms about the lack of transparency in the process and its impact on operational creditors such as suppliers, compared to an open bidding process like the CIRP.