Best Pre-Packaged Insolvency for MSME Companies Lawyer

When a corporate MSME is under financial stress, its promoters often fear the insolvency process, because a regular corporate insolvency resolution process (CIRP) removes the board, hands management to an insolvency professional, and opens the company to bids from outsiders. Pre-packaged insolvency, introduced into the IBC in 2021 for MSMEs, offers a different route: the promoters stay in management, negotiate a resolution plan with financial creditors in advance, and ask the NCLT to approve it within a short period, under the supervision of a resolution professional.

This page is for promoters and directors of stressed MSME companies and LLPs, and for their financial creditors. In short: the corporate debtor must be an MSME with a default of at least ₹10 lakh; at least 66% in value of its unrelated financial creditors must approve the proposed resolution professional before filing; the members must pass a special resolution, or partners a resolution by three-fourths; the debtor prepares a base resolution plan; the process must be completed within 120 days; management stays with the board; and if the plan impairs operational creditors, it must face a Swiss challenge from competing plans.

Pre-pack is not suitable for every stressed MSME. It works best where the business is viable, the financial creditors are few and supportive, and the promoters can offer a credible plan.

Is this your situation?

How pre-pack works

Eligibility in detail

Under Section 54A, a corporate debtor classified as a micro, small or medium enterprise under Section 7(1) of the MSMED Act can apply for the pre-packaged insolvency resolution process (PPIRP) if it commits a default of at least ₹10 lakh, the amount notified by the government. It must not have undergone a PPIRP or completed a CIRP in the preceding three years, must not be undergoing a CIRP, and must not have been ordered to be liquidated. Its promoters must be eligible to submit a resolution plan under Section 29A, subject to the MSME relaxation under Section 240A.

Before filing, the corporate debtor must obtain approval from financial creditors, not being related parties, representing at least 66% in value of the financial debt due to such creditors, for the name of the proposed resolution professional. Its directors or partners must declare that the debtor will file within a stated time, that the process is not being initiated to defraud anyone, and must propose the resolution professional. Its members must pass a special resolution, or in an LLP at least three-fourths of the partners must approve.

How a pre-pack runs

Time and typical cost range

Our fees are agreed in writing at the start, stage by stage, and are not linked to the outcome.

Documents needed

Pre-pack compared with regular CIRP

The base resolution plan and Swiss challenge

The corporate debtor presents a base resolution plan to the committee of creditors, which consists of the financial creditors. The committee can approve the plan with at least 66% of the voting share, ask the debtor to improve it, or reject it. If the base plan does not provide for full payment of operational creditors' dues, the committee must invite competing resolution plans from prospective applicants, in a process called a Swiss challenge, and the debtor gets a chance to match or improve on the best competing plan.

The base plan must meet the requirements of the IBC for any resolution plan, including payment to operational creditors of at least what they would receive in liquidation, and to dissenting financial creditors of at least what they would receive in liquidation. A credible plan, with real funding, is essential.

When pre-pack may not work

Pre-pack has been used less than expected since its introduction. Reasons include the need for 66% financial creditor support before filing, which may be hard to obtain where there are many lenders or where the lenders prefer a regular CIRP; the requirement that promoters be eligible under Section 29A, which some may not be; the cost of the process for a small company; and the risk that the Swiss challenge brings in a competing bidder.

For many small MSMEs, out-of-court restructuring under the MSME revival framework or a one-time settlement with the bank may be faster and cheaper. Pre-pack is most useful where the company has a viable business, a few supportive financial creditors, and operational creditors who can be paid in full or will not object. See MSME loan and NPA help.

Laws that apply

How we work

We are a litigation and advisory practice led by Advocate BK Singh, with offices in Dwarka (New Delhi) and Vaishali (Ghaziabad). This is what you can expect:

• Honest assessment: whether pre-pack suits your company, or another route is better.
• Creditor engagement: building support before filing.
• Plan documentation: a base plan that meets IBC requirements.
• NCLT handling: applications and hearings within the tight timelines.
• Written fee terms: agreed stage by stage, never linked to the outcome.

Mistakes with pre-pack

The resolution professional's role

In a pre-pack, the resolution professional does not take over the management, as in a regular CIRP. Instead, the professional confirms that the base plan meets the IBC's requirements, conducts the process, constitutes the committee of creditors, monitors the management of the corporate debtor's affairs, and reports to the NCLT. The board must keep the professional informed and seek approval for certain transactions outside the ordinary course of business.

If the management acts fraudulently or with gross mismanagement during the process, the committee can apply to the NCLT, by a 66% vote, to vest management in the resolution professional, or to terminate the pre-pack and initiate a regular CIRP. This keeps the debtor-in-possession model honest.

Operational creditors in a pre-pack

Operational creditors, such as suppliers, employees and service providers, are not members of the committee of creditors in a pre-pack, as in a regular CIRP. Their protection lies in the IBC's requirement that a resolution plan pay them at least what they would receive in liquidation, and in the Swiss challenge rule: if the base plan does not provide for full payment of their dues, the committee must invite competing plans.

For MSME debtors, whose operational creditors are often other small businesses, paying operational creditors in full in the base plan avoids the Swiss challenge and maintains supply relationships. Where full payment is not possible, expect the Swiss challenge and plan for it.

Avoidance transactions

In a pre-pack, as in a regular CIRP, the resolution professional must examine whether the corporate debtor entered into preferential, undervalued, fraudulent or extortionate transactions before the process, under Sections 43 to 51 and 66 of the IBC. The base plan must state whether such transactions exist and how they will be dealt with. Promoters should review past transactions with related parties, such as payments to promoter entities or transfers of assets, before filing, because such transactions may be reversed and affect the plan's credibility.

Financial creditors' perspective

For banks and NBFCs with exposure to stressed MSMEs, pre-pack can offer a faster resolution than a regular CIRP or SARFAESI action, with the business continuing and the promoters' knowledge retained. The NCLT's approval binds dissenting creditors, which out-of-court restructurings cannot do. Lenders should assess the base plan's realism, the promoters' commitment and funding, and compare the expected recovery with alternatives, including liquidation value.

Lenders may also use their support as leverage to improve the plan, for example through additional promoter contribution, equity conversion, or stricter monitoring covenants.

Costs of the process

A pre-pack involves fees for the resolution professional, legal and financial advisers, valuers who assess fair value and liquidation value, and NCLT filing fees. These costs, though lower than a regular CIRP in many cases, can be significant for a small company. The regulations allow the committee to approve the process costs, and the plan must provide for their payment. Discuss the budget with the financial creditors early, and keep the process lean.

After NCLT approval

Once the NCLT approves the plan, it binds the corporate debtor, its employees, members, creditors, guarantors and other stakeholders. Implementation follows the plan's terms: payments to creditors, conversion of debt, new equity, and changes in management where provided. A monitoring committee may oversee implementation. Failure to implement can lead to further proceedings, including liquidation, so the plan's commitments must be realistic.

The approval also extinguishes claims not provided for in the plan, as the Supreme Court held for resolution plans generally in Ghanashyam Mishra and Sons v Edelweiss ARC (2021). This gives the business a clean start, which is one of the main attractions of an IBC-based resolution over an informal settlement.

Preparing before filing

Much of the work in a pre-pack happens before anything is filed. The promoters, with their advisers, must prepare the base resolution plan, approach financial creditors, explain the plan, and obtain the 66% approval for the resolution professional. The resolution professional, once identified, prepares reports confirming that the debtor meets the eligibility conditions and that the base plan conforms to the IBC. This informal stage can take several weeks or months and is the key to a successful pre-pack.

During this stage, there is no moratorium, so creditors can still take recovery action. Promoters should therefore engage creditors early and openly, so that no creditor files a regular insolvency application while the pre-pack is being prepared.

Personal guarantees in a pre-pack

Promoters of MSMEs usually give personal guarantees for the company's loans. A resolution plan approved in a pre-pack binds the company and its creditors, but the Supreme Court has held, in the context of resolution plans generally, that approval of a plan does not automatically discharge personal guarantors (Lalit Kumar Jain v Union of India, 2021). Creditors may still proceed against guarantors for amounts not recovered under the plan.

Promoters should negotiate the treatment of their personal guarantees as part of the plan, for example a release on implementation, and make sure the plan and any related agreements state it clearly.

Choosing the right route for your MSME

For a stressed MSME, the main options are: rectification by paying overdues; restructuring under the MSME revival framework and RBI directions; a one-time settlement with lenders; a pre-packaged insolvency under Section 54A; a regular CIRP; or a sale of the business or assets. Pre-pack suits corporate MSMEs with viable businesses, supportive financial creditors, and promoters who can fund a credible plan. Restructuring and OTS are usually simpler and cheaper for smaller units. We assess the options with the business's figures before recommending one.