Context: The central government has promulgated an ordinance allowing the use of pre-packs as an insolvency resolution mechanism for Micro, Small and Medium Enterprises (MSMEs) with defaults up to Rs 1 crore, under the Insolvency and Bankruptcy Code.
About Pre Packs

• It is an agreement for the resolution of the debt of a distressed company through an agreement between secured creditors and investors instead of a public bidding process.
• Under this system, financial creditors will agree to the terms of a potential investor. Further, they will seek approval of the resolution plan from the National Company Law Tribunal (NCLT).
• However, the resolution plan cannot be submitted directly to NCLT. It requires approval of a minimum of 66% of financial creditors that are unrelated to the corporate debtor before submission of a resolution plan.
• Further, NCLTs also require to consider any application for a pre-pack insolvency proceeding before considering a Corporate Insolvency Resolution Process(CIRP).
• CIRP is the process of resolving corporate insolvency according to the provisions of the Insolvency and Bankruptcy Code, 2016.

What is the key motivation behind the introduction of the pre-pack?

• Pre-packs are largely aimed at providing MSMEs with an opportunity to restructure their liabilities and start with a clean slate while still providing adequate protections so that the system is not misused by firms to avoid making payments to creditors.
• Prepacks will help corporate debtors to enter into consensual restructuring with lenders and address the entire liability side of the company. 

Benefits of Pre-Packs 

• Quick Resolution: It enables a faster resolution, preserves and maximises value (of a company in a stressful state) and increases the possibility of resolution.
• Group Resolution: A resolution of a group of companies can be value-adding as compared to a separate insolvency proceeding for each company in distress.
• Reduce Litigation in Courts: It does not require involvement of the court during the informal part of the process and requires a minimum role of courts during formal process.

Benefits of Pre-Packs over CIRP

• One of the key criticisms of the CIRP is the time taken for resolution. At the end of December 2020, over 86% of the ongoing insolvency resolution proceedings crossed the 270-day threshold.
• In contrast, the pre-pack resolution process is limited to a maximum of 120 days. Further, only 90 days are available to the stakeholders to bring the resolution plan to the NCLT.

Management Control: Another key difference between pre-packs and CIRP is that the existing management retains control in the case of pre-packs. Whereas a resolution professional takes control of the debtor as a representative of financial creditors in the case of CIRP.