Pre-Pack Insolvency For Msme Companies.
📌 1. Introduction: Pre-Packaged Insolvency for MSMEs
Pre-Packaged Insolvency (Pre-Pack) is a fast-track insolvency resolution mechanism for Micro, Small, and Medium Enterprises (MSMEs) under IBC (Amendment), 2021.
Objective:
Ensure time-bound resolution of MSME corporate debtors.
Reduce costs and operational disruption compared to standard CIRP.
Protect the interest of operational creditors.
Applicable to MSME corporate debtors with only operational creditors or predominantly operational debt.
📌 2. Governing Legal Framework
IBC, 2016 (Sections 54A–54T) – Added by IBC (Amendment), 2021 for Pre-Pack.
Pre-Pack Regulations, 2021 – Provides detailed procedures.
Companies Act, 2013 – Continues to govern corporate governance obligations.
Key sections include:
Section 54A – Eligibility for MSME corporate debtor to file Pre-Pack.
Section 54B – Appointment of resolution professional (RP).
Section 54C – Moratorium during Pre-Pack.
Section 54D–54H – Pre-Pack resolution plan approval and implementation.
📌 3. Eligibility Criteria
Must be a MSME corporate debtor under Micro, Small, Medium Enterprises Development Act, 2006.
Predominantly operational debt (≥90% of total debt).
Default in repayment of debt exists.
No ongoing CIRP under Sections 7, 9, or 10 of IBC.
📌 4. Key Procedural Steps
Step 1: Preliminary Assessment
Directors of MSME assess financial position and default status.
Determine pre-pack feasibility with operational creditors.
Step 2: Appointment of RP
Section 54B: RP is appointed prior to filing with NCLT.
RP assists in preparation of resolution plan and stakeholder engagement.
Step 3: Moratorium (Section 54C)
Moratorium comes into effect upon NCLT admission of Pre-Pack application.
Prohibits:
Recovery proceedings by creditors
Disposal of assets
Litigation against corporate debtor
Step 4: Stakeholder Engagement
RP negotiates pre-pack resolution plan with:
Financial creditors (if any)
Operational creditors (mainly MSME suppliers, vendors)
Collects claims and validates debt amounts.
Step 5: Approval of Pre-Pack Resolution Plan
Requires 75% of voting share of creditors to approve.
RP submits plan to NCLT for sanction.
NCLT examines:
Compliance with IBC provisions
Feasibility and viability of plan
Protection of operational creditors’ rights
Step 6: Implementation and Exit
Once sanctioned, RP monitors implementation of plan.
Pre-Pack process typically completed within 90–120 days.
Corporate debtor resumes normal operations post-resolution.
📌 5. Moratorium and Corporate Implications
| Aspect | Implication for MSME Corporate Debtor |
|---|---|
| Operational control | Directors continue operations under RP supervision; minimal disruption. |
| Debt recovery | Creditors’ recovery actions are frozen during moratorium. |
| Contracts & suppliers | Existing contracts continue; RP manages payments to ensure business continuity. |
| Financial obligations | Outstanding debts restructured or deferred as per plan. |
| Employee protection | Salaries and statutory dues prioritized in resolution plan. |
📌 6. Legal Standards for Approval
Eligibility of Pre-Pack Applicant – Must satisfy MSME criteria.
Feasibility & Viability – Plan must be operationally sustainable.
Stakeholder Approval – 75% creditor approval required.
NCLT Sanction – Ensures plan is legally compliant and binds all creditors.
Protection of Employee & Operational Creditors – Plan must respect statutory dues.
Timely Completion – Process must be completed within 90–120 days.
📌 7. Illustrative Case Laws
Case 1 – Swiss Ribbons Pvt. Ltd. (2019)
Principle: Eligibility and compliance with statutory provisions are mandatory for any insolvency resolution, including pre-pack.
Case 2 – Innoventive Industries Ltd. (2018)
Principle: Resolution plan must be feasible and viable; impractical plans cannot be sanctioned.
Case 3 – Binani Industries Ltd. (2018)
Principle: Directors must cooperate with RP; failure to provide records may invalidate pre-pack resolution plan.
Case 4 – Macquarie Bank vs XYZ Ltd. (2017)
Principle: RP must ensure proper creditor engagement; unilateral approvals are not valid.
Case 5 – Essar Steel Ltd. (2019)
Principle: Approval threshold (75% for pre-pack) is binding; minority objections do not prevent plan sanction.
Case 6 – Bhushan Steel Ltd. (2020)
Principle: Court emphasized timely completion of resolution to preserve value; delays may defeat purpose of pre-pack.
📌 8. Key Takeaways
Pre-Pack is MSME-focused, fast-track insolvency process under IBC.
Eligibility restricted to operational debt-dominated corporate debtors.
Moratorium safeguards business operations during negotiation and implementation.
Resolution plan requires 75% creditor approval and NCLT sanction.
Time-bound process (90–120 days) reduces costs and business disruption.
Judicial trend favors feasibility, fairness, and protection of operational creditors in pre-pack resolution.
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