We must make insolvency pre-packs work for MSMEs

livemint.com:

Pre-packaged insolvency resolution processes, or pre-packs, were introduced to India’s Insolvency and Bankruptcy Code (IBC) in April 2021 with the goal of giving micro, small and medium enterprises (MSMEs) a fast, cost-efficient and effective way to resolve financial stress. Debtors and creditors are expected to put an early effort into resolving a troubled MSME’s liquidity problems quickly. The pre-insolvency regime is especially important for MSMEs, which have simple business structures and can’t absorb sudden disruptions.

Pre-packs were introduced with covid having paralysed the sector. Their performance so far, however, has been abysmal. The present scheme of pre-packs is daunting.

The pre-admission stage needs 11 sub-processes to be ticked, and if the debtor is admitted, there are myriad process flows to be adhered to. Such a complex process is difficult to execute for financially sound businesses, let alone those in distress. This has led to today’s state of affairs, with just 17 cases underway (as of 2 February 2024) even after nearly three years of being introduced.

A review of cases reveals that only four plans have been approved of the nine admissions. The cases that were admitted took an average of 483 days in the insolvency process. The pre-insolvency process faces several challenges.

There is a stigma associated with insolvency. Also, a vast number of MSMEs are non-corporates, beyond the purview of the legislation. The pre-pack pre-supposes that debtor businesses are sophisticated enough to undertake the processes envisioned.

This is not the reality for a vast majority of insolvent MSMEs. A systemic problem has been low awareness. Creditor passivity hampers the process.