Pre-packaged debt resolution for MSMEs
GS Paper - 3 Economy
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). India currently has about 6-7 lakh companies that are classified as MSMEs and potentially these many could benefit from the newly introduced pre-packaged insolvency framework.
- A pre-packaged insolvency — in the Indian framework context— is an arrangement where the resolution of a company’s business is negotiated with a buyer before the appointment of an insolvency professional.
- It is a blend of informal and formal mechanisms, with the informal process stretching upto NCLT admission, followed by the existing NCLT supervised process for resolution as specified under the Insolvency and Bankruptcy Code (IBC).
- Pre-packs are seen to be a viable alternative to the current corporate insolvency process and would be significantly less time-consuming and inexpensive as against the formal insolvency proceedings.
- The government has deemed it fit to first introduce pre-packs for MSMEs as they are critical for India’s economy and they contribute significantly for the country’s gross domestic product besides providing employment to a sizable population.
- MSMEs in India have relatively suffered most during the current pandemic times.
- Also with threshold of debt default at ₹ 1 crore now under IBC, most of the MSMEs are out of this range.
- The Centre is expected to in coming days notify the debt default threshold for MSMEs for which pre-packaged insolvency resolution process could be used.
- The ordinance specifies a maximum time period of 120 days from the pre-packaged insolvency commencement date by when the pre-pack process should be completed.