The Prepack Insolvency Resolution Process, which came into force in April 2021 to help small and medium enterprises impacted by Covid-19, has been quite a non-starter. As explained recently in an article in this newspaper, there have been 13 prepack applications till date, with five plans having been approved, one withdrawn and seven cases still ongoing. This comes as a surprise, given the standout benefits of the scheme on paper.
Unlike corporate insolvencies — where the resolution plan takes shape well after the entity is admitted to the IBC and the creditors take over the concern from the promoter — ‘pre-pack’ resolution plans as the term suggests are rustled up by the MSME debtor and secured creditors before initiating insolvency proceedings. They apply to defaults below ₹1 crore. The National Company Law Tribunal approves the plan, after which the resolution professional oversees the implementation; crucially, the promoter remains in control of the concern. A process that seems less cumbersome and costly for MSMEs should have evoked a better response. The Centre should inquire into why there have been no takers.
Lack of awareness in the MSME universe — according to the Budget, there are 5.93 crore MSMEs, and over 95 per cent of them are micro enterprises with a turnover of less than ₹5 crore (now revised upwards to ₹10 crore) — has been cited as a major factor. The second could be reluctance on the part of the debtor to go for a prepack, which will let the word out that his enterprise is in trouble, jeopardising its recovery chances. While prepacks deserve a push for their potential benefits (better value realisation, timeliness and revival prospects), an October 2020 report drawn up for the Ministry of Corporate Affairs anticipates two problems — lack of transparency in drawing up a resolution plan as well as less regulatory oversight relative to corporate insolvencies. It would be instructive to look into the experiences of other countries that have pre-packed insolvencies in place, such as US, UK, Canada, France and Singapore.
There is some potential to explore pre-packs for larger units, provided the interface between debtors and creditors improves. At present, there are some misgivings over how promoters have managed to get back the company at rock bottom prices in many IBC cases. Unless IBC becomes robust in terms of value realisation as well as revivals, pre-packs should not be expanded in scope. Insolvency resolution has been governed by two systems — debtor-in-possession (recoveries under Companies Act and the Reserve Bank guidelines) and creditor-in-control (IBC). In times of economic shock, debtors may not be responsible for insolvency. But in cases where debtors have created a maze of firms to siphon off funds or run the show poorly, the case for pre-pack does not exist. Creditors need to develop the skills to smell trouble in time and recover their assets. In such cases, which are only too common, pursuing any resolution plan can be a waste of time and money.