The MSME sector in India accounts to be the second employment generating sector, agriculture being the first. It gives opportunities to people with skills and entrepreneurship qualities to start small businesses, with a very significant amount. In India, we have 63.38 million MSME which holds the employment of 111 million people[i]. The goods manufactured by these MSMEs contribute largely to domestic production and exports all around the globe. In the year 2019, MSMEs contribute 29.7% of GDP and 49.66% of Indian Exports[ii]. The growth of these MSME aids as a catalyst to Socio-economic development. The government had a mission of achieving a $5 trillion economy by 2025, in which the MSME’s contribution should be remarkable with more than 50%[iii].

This was all before the pandemic arrived. After the announcement of the lockdown due to the coronavirus, the situation changed. The lockdown created a negative impact on the working of the MSMEs. They started facing various challenges including debt repayment, payment of salary wages, statutory dues and other personal expenses. The lowest risk MSMEs that missed payments jumped from 9% in March to 25% in June. The greatest risk MSMEs that missed payment jumped to 36% in June from 11% in March 2020[iv]. This justifies the situation of MSME is in India. The earning of these MSMEs was cut down by almost 20%-50%[v] with just a hope that things might come to normal within a few months. It has been almost a year, the pandemic isn’t over and the challenges are increasing day by day. Consumers are unable to buy products because of their low disposable incomes. The jobs of workers have been impacted because of the inability to pay salaries. The government at this point has the main responsibility of boosting confidence in the market and regulating a proper cash flow. All of this can be done by altering the credit and finance scheme, clearing of dues, disallowing global tenders, providing relief in NPA or providing a mechanism for easy exit. The pandemic has made things critical and has impacted employment, fiscal deficit, read balance, local economic development, financial sector development, sustainable development goals and their alignment and a lot more. The supply and demand chain also seems to be a concern.

Pre-Packaged Insolvency Resolution Plan

The IBC region witnessed another IBC amendment ordinance 2021 that provides relief to the micro, small and medium enterprises.  Any default of one crore or less can be initiated under the pre-packaged process by the corporate debtor. This ordinance is added as chapter IIIA in the 2016 code. This would apply to all the MSMEs classified under section 7(1) of the micro, small and medium enterprises development act, 2006. This ordinance has been passed As a result of the pandemic. The motive behind bringing this ordinance was to provide value maximisation outcome and a faster Mechanism for stressed MSMEs. The pre-packaged process proves to be a full-fledged solution to relieve stress. Moreover, having such an ordinance at this point of time where the IBC stands suspended for a year proves to be a great move. On March 25, 2020 section 7, 9 and 10 were suspended, wherein no CIPR Can be initiated by financial creditors, operational creditors and corporate debtor.

This ordinance has been introduced keeping in mind the specific requirements of MSMEs relating to the resolution of insolvency due to the unique nature of their business and simpler corporate structure[vi]. The resolution process under this pre-packaged ordinance is much faster, focuses on value maximisation and is cost-effective for all the stakeholders. It focuses upon the reservation of jobs and provides the least disruptive resolution mechanism. Rajiv Chandak, a partner at Deloitte India quotes:

“Pre-packs will help corporate debtors to enter into consensual restructuring with lenders and address entire liability side of the company. Government needs to further augment the NCLT’s infrastructure so that pre-packs can be implemented in time-bound manner[vii]

This pre-packaged resolution process can be initiated by entities that have not withstood bankruptcy proceedings in the preceding three years and are not facing any liquidation orders[viii]. Before initiating the package insolvency resolution process, no liquidated order should be passed under section 33 against the company, and the corporate should be eligible to submit a resolution plan under section 29A. The directors and the partners should make a declaration regarding the same, for initiation of the process. A special resolution must be passed by 3/4th of the total number of partners in a partnership firm. As per this, corporate debtors can enter into “consensual restructuring” with the creditors, to address the company’s liability. Besides, the corporate debtor needs a 66% approval from the financial creditors as an approval to initiate the pre-packaged insolvency process.

The pre-packaged insolvency resolution process must comply with the laws of the code. Section 29 of the insolvency and bankruptcy code, 2016 prevents defaulting promoters to take back their companies. Moreover, a pre-packaged insolvency resolution process can be converted into corporate insolvency resolution process by the creditor’s committee which 66% of the majority votes. In case of fraud, The NCLT can intervene and take control from the board. The central government specifies Rs. 10 lakhs as minimum amount of default for matters relating to pre-packaged insolvency resolution process under the code

The moratorium in the PPIRP shall be available between the commencement of the pre-packaged insolvency resolution process till the closure. An appeal can be made against the approval of the resolution plan under the pre-packaged deal as per the grounds mentioned under section 61(3) of the 2016 code. The pre-packaged in India is a law in different nations including Canada, France, Singapore, the US, UK etc.

What’s The Difference?

In the pre-packaged insolvency resolution process, the management of the affairs of the company remains with the board of directors or the partners of the corporate. On the other hand, during the CIRP the corporate stands in the hands of the resolution professionals. In the PPIRP the resolution process will be completed in 120 days from commencement which includes submission of the plan within 90 days and 30 days to get the approval from the NCLT. As per the CIRP, it takes 180/270 days for the completion of the process[ix]. This means that the pre-packaged process is a fast resolution process as compare to CIRP. Moreover, it allows only the debtors to initiate the process, which indirectly cuts cost. Furthermore, since this procedure will only be undertaken by firms with the approval of 66 per cent of their unrelated financial creditors, there would be fewer chances for lawsuits, allowing the process to operate more smoothly than the traditional CIRP.

If there is a pending application of a stressed MSME under section 7, 9, 10 of the code and the corporate has again filed a pre-pack application, the latter will be prioritised. This ordinance proves to be a fast track mechanism for stressed MSME is to resolve their corporates easily.

Drawbacks of the Pre-Package Deal

There are certain drawbacks of the pre-packaged insolvency resolution process, as it has been just introduced. First of all, it lacks transparency. It is necessary to reduce transparency and bring it to a similar level as compared to the CIRP. In the CIRP, financial creditors can reach an agreement with a potential investor privately and not through an open bidding process. This can indirectly impact the operational creditors and the treatment given to them, to reduce the liabilities of the distressed company. Apart from this, insufficient marketing is a huge drawback because when the marketing is less, less money is returned to the creditors. Another drawback of this free package is that there is no future viability of the company taken into consideration by the practitioner.

Fulfilment of SGD 8

The pandemic has created a huge impact on the fulfilment of sustainable development goals 8, decent work and economic growth. As a developing country and boosting economic growth seems to be the most important aspect for the fulfilment of sustainable development goals. It tries to make a sustainable and resilient environment for all the people and their well-being. The agenda of this goal was to have an economic growth rate of 7% for the least developed countries by 2030 along with full and productive employment For men and women in the next 15 years[x]. Having such an insolvency ordinance at this point helps India cope with economic growth and also fulfils the SGD goal of inclusive and equitable finance. Over organisations like UNCDF Also contributes to the same, supporting banks, microfinance institutions, cooperatives, money transfer companies and various other operators. It provides financial products[xi] for MSMEs at a reasonable cost, for a sustainable future. It is necessary to stabilise the Indian economy by selling stressed assets which can be used for other causes.


This ordinance is a silver lining, a ray of hope for small scale enterprises to distress themselves. It is a new mechanism hence there should be better structuration of laws along with proper implementation. Dissenting creditors can try to derail a negotiation by hijacking it. A pre-pack negotiation can also cause a slew of recoveries from creditors under different rules, leading to a broken dissolution of the debtor, winding up with the least asset value of the debtor estate in the absence of legal security (similar to section 14 moratorium)[xii]. There can be chances of phoenixing, where companies that were technically insolvent move towards winding up through a pre-packaged resolution process. The IBC code is evolving, with a high degree of expertise and easy mechanisms for enterprises to distress. It becomes the duty of the corporate debtors to know their self-worth, identify cause and effect and then execute decisions. PPIRP would be the best alternative way for com

[i] MSME sector: Indian Economy: Engineering review | Engineering Review, (last visited Apr 11, 2021)

[ii] MSMEs Contribute 29.7% Of India’s GDP Business Standard, (last visited Apr 11, 2021)

[iii] Ambition on hold: India’s pursuit of $5 trillion economy by 2025 will need recalibration The Economic Times, (last visited Apr 11, 2021)

[iv] Data: MSMEs continue to be most stressed sector, urban cooperative banks at risk The Hindu, (last visited Apr 11, 2021)

[v] Nearly half MSMEs witness 20-50% impact on earnings due to COVID-19 pandemic: Survey – ET Retail, (last visited Apr 11, 2021)

[vi] Govt amends insolvency law; introduces pre-packaged resolution process for MSMEs mint, (last visited Apr 11, 2021)

[vii] Govt amends insolvency law; introduces pre-packaged resolution process for MSMEs mint, (last visited Apr 11, 2021)

[viii] MSME insolvency gets pre-packaged resolution route mint, (last visited Apr 11, 2021)

[ix] Analysis of Time Limit under Section 12 of the Insolvency and Bankruptcy Code, 2016 for completion of CIRP IBC Laws, (last visited Apr 11, 2021)

[x] SDG 8: Decent Work And Economic Growth United Nations, (last visited Apr 11, 2021)

[xi] COVID-19 Financial Inclusion and the SDGs – UN Capital Development Fund (UNCDF), (last visited Apr 11, 2021)

[xii] What Is Pre-Pack Insolvency Or Bankruptcy? – Insolvency/Bankruptcy/Re-structuring – India Welcome to Mondaq, (last visited Apr 11, 2021)

Author Bio

Qualification: Student- Others
Company: N/A
Location: Ahmedabad, Gujarat, India
Member Since: 16 Apr 2021 | Total Posts: 3

My Published Posts

More Under Corporate Law

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

May 2021