21 Dec 2021 Ankit Chadha

The Pre-Pack Insolvency For MSME: The New MSME Insolvency Procedure Explained

MSME insolvency | TRC Corporate Consulting

The pandemic has majorly impacted the lives of many. Everyone went through life-changing events that altered the course of their life. Millions of people lost their loved ones while many sat home unemployed without any source of income.  A massive number of daily wagers lost their jobs and lives at the same time and could do nothing to make it better.  For the first time in many years, the rich and the poor faced similar struggles. All income groups were affected, out of which some are still struggling to recover from their losses completely.

Apart from the individual shortfalls, the market as a whole was also heavily affected. All the small and medium businesses were either going through loss or were dealing with hefty credit, losses to the extent that some even had to shut down abruptly. This was when the term MSME Insolvency got everyone's attention.

Considering everything that small and medium businesses had to go through during and post the second wave of Covid-19, IBC came up with the concept of pre-pack insolvency for MSME. The MSME insolvency India was previously treated as the insolvency of any other established organization, where even the creditors can request the MSME to become insolvent.

But now, MSME insolvency can be requested when in case there is a default in payment of a debt of ? 10.00 Lakhs or more. Under the pre-pack insolvency for MSME, the organization's existing management can propose the MSME resolution plan to its creditors and NCLT to solve their financial stress.

 

Why pre-pack insolvency for MSME? 

The MSMEs are essential for the economy of the nation; thus, to protect the small and medium firms of the country, the government has introduced the pre-packs for MSME insolvency. These businesses contribute significantly to the country's gross domestic product besides generating employment for a sizeable population. Also, MSMEs in India have comparatively suffered a lot during the pandemic. With the threshold of a debt default at ? 1 crore now under IBC, the MSMEs are no more a part of this limit.

The Process of MSME insolvency

The pre-pack MSME insolvency India is a three-step process that includes the following:

  1. Compliance of MSME resolution plan by the debtor and its consideration by the committee of creditors.
  2. On failure of this resolution plan to gather support, the resolution professional requests prospective resolution claimants to submit resolution plans that can compete with the plan that the committee of creditors assesses.
  3. There is a comparison of the base MSME resolution plan and the invited plans, and then the selected plan is enhanced based on inputs from the other.

What eligibility criteria must a company pass to be eligible for pre-packaged insolvency resolution under the IBC?

Any organization or LLP that categorizes as an MSME under Section 7(1) of the Micro, Small and Medium Enterprises Development Act, 2006 should fulfil the following requirements:

  1. It should have been unable to pay or failed to pay a scheduled and payable debt of INR 1 million or more.
  2. It should not have undergone a corporate insolvency resolution process that is the normal insolvency process under IBC (CIRP) during the past three years.
  3. It must not have any liquidation orders passed against it.
  4. It should qualify all the criteria mentioned under Section 29A of the IBC.

Who is a Resolution Professional? 

In the process of MSME insolvency, a Resolution Professional (RP) plays an important role  as they are the first person hired and the last person to be dismissed in the entire process.

The primary role of the Resolution Professional is to support and ensure the recovery of the corporate debtor. However, it is crucial for the RP to keep the process transparent and just.

The Cost and Duration Of The Pre-Pack MSME insolvency

The company that is willing to be insolvent incurs the cost of running the PPIRP, unlike CIRP. Also, the cost of initiating PPIRP is way lesser since,  it is basically, a kind of voluntary restructuring of the company by the managers. Hence, there is no need for unnecessary litigations and delays in completing the process. However, the time duration required to complete the PIRP is just 90 days, and it is significantly shorter than the insolvency process for established companies.

Who can initiate PPIRP?

The MSME that is a debtor can itself initiate a PPIRP by filing an application for initiation of the process. A sanctioned shareholder or partner of the MSME or an individual who manages the MSME's operations and resources or controls and supervises its financial affairs must file the application.

Why Partner with TRC Corporate Consulting to initiate MSME Insolvency Process? 

TRC Corporate Consulting constantly strives to give each client individual attention and customized services to cater to their specific needs. So, whether it's the liquidation process, insolvency resolution process, management task or financial advisory services, TRC Corporate Consulting's services have proved to be highly supportive over the years. With years of market experience combined with modern tools and techniques, the experts at TRC corporate consulting also provide additional services that include 29A Verification, Claim Collection, FAR Management, and much more.

TRC Corporate Consulting's skilled team of insolvency professionals use an analysis and assessment method with impartial understanding before taking any further steps in the insolvency resolution process and keep you well-informed and updated on the procedures.