Prepackaged Insolvency Resolution for MSMEs – First step towards a long awaited Legal Framework

The Hon’ble President of India promulgated an ordinance being the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 dated 4 April 2021 (Ordinance) which inter-alia added Part III-A to the Insolvency and Bankruptcy Code, 2016 (IBC), introducing a framework for prepackaged insolvency resolution (Prepack) for corporate debtors qualifying as micro, small and medium enterprises (MSMEs). The Ordinance comes in the backdrop of the Covid-19 pandemic on MSMEs given that the pandemic exposed many of such businesses to severe financial distress. Last year, around the same time, recognizing the need for protecting smaller businesses, the Government of India, by way of a notification dated 24 March 2020, had also raised the minimum threshold for initiating corporate insolvency resolution processes (CIRP) to INR 1 crore (approx. USD 130,000) from earlier INR 1 lakh (approx. USD 1300). This was followed by a 1 (one) year suspension on initiation of any new insolvency proceedings for defaults occurring on or after 25 March 2020, irrespective of the size of default.