Govt brings ordinance for 120-day, pre-packed insolvency resolution for MSMEs

Looking to address the needs of micro, small, and medium enterprises (MSMEs) in relation to insolvency, the government has introduced an ordinance for a 120-day, pre-packed insolvency resolution process.

A form of restructuring allowing creditors and debtors to work on an informal plan prior to filing for insolvency, the pre-pack will look to identify stress early, facilitate fast resolution, and reduce costs and litigation. It will operate under the Insolvency and Bankruptcy Code.

A government ordinance reportedly said:

“Micro, small, and medium enterprises are critical for India’s economy as they contribute significantly to its gross domestic product and provide employment to a sizeable population. It is considered necessary to urgently address the specific requirements of micro, small, and medium enterprises relating to the resolution of their insolvency, due to the unique nature of their businesses and simpler corporate structures."

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The pre-pack is expected to act as an alternative, efficient insolvency resolution process to ensure quick, cost-effective outcomes for all stakeholders, in a manner that is least disruptive to the continuity of their businesses and which preserves jobs, the ordinance added.

It specified that under the pre-pack process, approval is required by not less than 66 percent of the financial creditors and the process has to be completed in 120 days.

Further, management of the firm will continue to best in the board of directors, subject to conditions, and the government may specify default thresholds of not more than Rs 1 crore for pre-pack eligibility.

The pre-pack scheme comes in the backdrop of a potential rise in bad loan cases after the suspension of insolvency proceedings against COVID-related defaults was lifted on March 25, 2021.