Insolvency Without Assets? Rethinking India’s Pre-Pack Framework for MSMEs

[Amritanshu is a student at National Law University Odisha.]

India’s micro, small and medium enterprises, MSMEs, as we shorthand them, are everywhere. They're the printing shops across the street, the local suppliers behind big-name brands, and the workshop units in industrial pockets we often forget to map. They generate nearly 30% of India’s GDP and employ over 110 million people. You would think such a vital sector would have robust legal safety nets. But in financial distress? Most MSMEs are on their own.

That is what the pre-packaged insolvency resolution process (PPIRP) was supposed to fix. Introduced through the 2021 amendment to the Insolvency and Bankruptcy Code 2016, this framework was designed specifically for MSMEs, to give them a quicker, cheaper, and less disruptive way to resolve their debt problems without going through the full-blown, time-consuming corporate insolvency resolution process (CIRP). On paper, it looked promising.

But here is the problem: nobody is using it. Four years in, PPIRP remains a ghost town. Why? Because it assumes things that most MSMEs do not actually have: clean books, eager creditors, and, well, assets. This piece looks at why India’s pre-pack insolvency solution may not be solving much at all, and how that might change.

What PPIRP Was Meant to Do

The pre-pack model in India takes inspiration from similar mechanisms in jurisdictions like the UK and US, where pre-negotiated deals help companies avoid long-drawn litigation. Under India’s PPIRP, eligible MSMEs i.e., those with defaults of at least INR 10,00,000 can submit a resolution plan that has already been discussed and approved (by at least 66% of unrelated financial creditors) before filing it with the tribunal.

Importantly, the company stays in control, this is the “debtor-in-possession” model. The process is capped at 120 days, far quicker than the standard CIRP. If the base plan offered by the debtor does not harm operational creditors, it can be accepted outright. Otherwise, the plan faces a Swiss Challenge, inviting others to propose better alternatives.

It sounds sleek, even elegant. And yet, hardly anyone is using it.

A Framework with Barely Any Takers

According to the Insolvency and Bankruptcy Board of India’s (IBBI) most recent updates, only 13 cases have been admitted under PPIRP since 2021. Five plans were approved. One was withdrawn. The rest are still pending. For a mechanism built to serve hundreds if not thousands of struggling MSMEs, these numbers are bleak.

What explains this disinterest? The reasons are not exotic; they are painfully ordinary.

Most MSME promoters do not have the legal support to prepare a resolution plan. They certainly don’t have the leverage to coordinate and convince two-thirds of their financial creditors in advance. Many do not even know what PPIRP is. As for creditors, especially public sector banks, they are reluctant to engage in informal, behind-the-scenes negotiations with promoters. It is safer for them to wait for formal CIRP and let the National Company Law Tribunal (NCLT) sort things out.

The result? MSMEs in distress either languish in limbo or simply shut down. The mechanism built to save them ends up sitting idle.

Where the Framework Falters

One of the PPIRP’s first barriers is its eligibility threshold. Only MSMEs with defaults over INR 10,00,000 can apply. That may sound low, but in practice, it excludes many viable businesses facing liquidity crunches below that threshold. It forces them to wait until their situation worsens, completely undermining the goal of early resolution. Critics in legal and policy circles have argued that the fixed INR 10,00,000 default threshold, though intended to shield the smallest enterprises, may paradoxically lock out many SMEs that are already distressed.

Another weak spot is the over-reliance on the promoter’s base resolution plan. In theory, the Swiss Challenge should let others come in with better offers. In practice, that almost never happens. Why? Because the playing field is far from level. Third-party bidders have no access to the same information or internal data that the promoter does. Even creditors aren’t fully in the loop. The promoter remains in control throughout, making it difficult to dislodge their plan even if it is subpar.

There is also the issue of time. Everything is on a tight schedule, plan submission in 90 days, tribunal approval in 30. That leaves very little room for creditors to assess claims, perform due diligence, or evaluate competing offers. As noted in the IBBI’s Annual Publication (October 2023), the average time taken just to admit PPIRP applications has stretched to nearly 79 days, raising serious concerns about the viability of a mechanism that is supposed to conclude in 120. The report warns that unless these procedural inefficiencies are resolved, the PPIRP may remain underutilized and fail to serve its intended purpose. Speed is good, but not when it short-circuits fairness.

And let us not forget the biggest elephant in the room: operational creditors are almost entirely left out. MSMEs typically owe more to trade creditors, suppliers, vendors, service providers, than to formal banks. Yet, under PPIRP, only financial creditors form the committee of creditors. Operational creditors get neither voting rights nor a meaningful say.

All of this assumes, of course, that the participants understand the process. But many don’t. Promoters aren’t trained to draft base plans. Banks don’t have internal guidelines for pre-packs. Insolvency professionals are still figuring out the nuances. There is no handholding, no centralized support, and barely any outreach. The institutional setup just is not there yet.

So How Do Other Countries Get This Right?

The UK, for instance, has long used pre-pack administration, often controversially, but with structure. Administrators are required to justify their choices to creditors. Valuation reports must be disclosed. Competing bids are actively sought. There is also guidance from regulatory bodies like the pre-pack pool, offering oversight and credibility.

India’s version does not have any of that. The process is opaquer. The valuation process is not always independent. Information asymmetry is rampant. And competing bidders often walk away because they don’t stand a fair chance. For a model meant to be collaborative, it ends up feeling quite insular.

Reform is not Optional; It is Urgent

So where do we go from here?

For starters, the default threshold of INR 10,00,000 should be revisited. A more nuanced approach, one that considers sector-specific needs and allows for pre-default distress filings, might open the door to MSMEs that are struggling but still salvageable.

We also need to fix the Swiss Challenge loophole. Base plans should be made more transparent. mandatory disclosures, audited financials, and public invitation notices could help level the playing field. It is not just about fairness; it is about generating better outcomes.

Then there is the matter of timeline flexibility. A one-size-fits-all 120-day cap may be too rigid, especially when dealing with multiple creditors or cross-border elements. Giving the NCLT some discretionary power to extend timelines for justified reasons would be a small change with big impact.

And, most importantly, creditor participation needs to be reimagined. Operational creditors cannot be treated as second-class participants. At the very least, they should have observer rights or a statutory platform to object to base plans that impair their claims.

Finally, none of this will work without education and institutional support. The IBBI must take the lead in training stakeholders, promoters, insolvency professionals, banks, and even judges on how PPIRP is supposed to function. Ready-made templates, sector-specific guidance notes, and capacity-building workshops are all long overdue.

Conclusion: Is the Pre-Pack Dream Still Alive?

The pre-pack insolvency framework was crafted with the best of intentions. It aimed to protect MSMEs from the procedural weight of CIRP while ensuring that their businesses could be salvaged quickly and quietly. But in practice, it remains a tool too complex, too exclusive, and too disconnected from how MSMEs actually function.

If left as it is, the PPIRP risks becoming a well-drafted reform that no one uses: an insolvency process without assets, without access, and ultimately without impact.

But if we listen to the early warnings, fix what is broken, and build trust in the system, there is still a chance to get it right. MSMEs deserve a process that recognizes their unique constraints and gives them a fair shot at recovery.

And for that to happen, we will need more than legislation. We will need intent, implementation, and inclusion.