Pre-Pack Insolvency Under Section 54: The Section 240A Framework

Chapter III-A of the Insolvency and Bankruptcy Code, 2016, introduced by the 2021 amendment, establishes a pre-packaged insolvency resolution process for MSMEs. The framework is structurally distinct from the standard CIRP — it is initiated by the corporate debtor, is more time-compressed, and preserves operational continuity in defined ways.

The framework

The pre-packaged insolvency resolution process (PPIRP), introduced through the IBC (Amendment) Ordinance, 2021 and subsequently enacted, applies to corporate debtors classified as micro, small and medium enterprises (MSMEs) under the MSMED Act, 2006. The PPIRP is contained in Chapter III-A of the IBC (Sections 54A to 54P).

The principal features that distinguish PPIRP from the standard CIRP are:

• Debtor-initiated: PPIRP is initiated by the corporate debtor, with the consent of unrelated financial creditors representing 66% by value.
• Pre-negotiated base resolution plan: a base resolution plan is submitted at initiation, having been negotiated between the corporate debtor and the principal financial creditors before the proceeding.
• Continued operation by existing management: the corporate debtor's existing management remains in operational control, subject to the supervision of the Resolution Professional.
• Compressed timeline: the process must be completed within 120 days, with the resolution plan submitted within 90 days.

The MSME threshold

The PPIRP is available only to corporate debtors classified as MSMEs under the Micro, Small and Medium Enterprises Development Act, 2006. The MSME thresholds — based on investment in plant and machinery and turnover — were revised in 2020:

• Micro: investment up to ₹1 crore and turnover up to ₹5 crore.
• Small: investment up to ₹10 crore and turnover up to ₹50 crore.
• Medium: investment up to ₹50 crore and turnover up to ₹250 crore.

The classification determines availability of the pre-pack route. A corporate debtor that exceeds the medium threshold cannot avail of PPIRP; it must use the standard CIRP under Sections 7, 9 or 10.

The Section 240A protection

Section 240A of the IBC provides specific MSME-related modifications to the standard CIRP framework. Section 240A(1) excludes MSME corporate debtors from certain disqualification provisions of Section 29A — specifically, Section 29A(c) (NPA accounts) and Section 29A(h) (personal guarantor disqualification).

The exclusion enables the existing promoters of an MSME corporate debtor to participate in the resolution process, even where the corporate debtor's account has been classified as NPA or where the promoter is otherwise disqualified under Section 29A. This is a structural recognition that, for MSMEs, promoter participation is often essential to operational continuity.

The base resolution plan

The base resolution plan is the foundation of the PPIRP. The plan is negotiated between the corporate debtor and the principal financial creditors before the formal initiation of the proceeding, and is submitted to the NCLT alongside the application for initiation.

The base plan must address the standard requirements of a resolution plan under Section 30(2) — settlement of operational creditors, satisfaction of insolvency-resolution-process costs, payment of preferential and undervalued transaction recoveries, and so on.

Once submitted, the base plan is subject to the Swiss-challenge process: third-party resolution applicants can submit alternative plans within a specified window, with the corporate debtor having a right of first refusal to match the best alternative plan.

The Swiss-challenge mechanism

The Swiss challenge under Section 54K provides a structured competitive process. Once the CoC is satisfied with the base plan, it is published; alternative resolution plans can be submitted within a specified window. The CoC evaluates all plans on a defined matrix.

The corporate debtor (or the proposing party of the base plan) has a right to match the best alternative plan. If the corporate debtor matches, the corporate debtor's plan is approved; if it does not, the alternative plan proceeds.

The Swiss-challenge mechanism preserves the negotiated nature of the pre-pack while ensuring competitive pricing. The base plan cannot be a sweetheart deal — it must be commercially competitive, or it will be displaced by an alternative plan in the challenge process.

The 120-day timeline

The PPIRP timeline is significantly compressed compared to standard CIRP:

• Base plan submission: with initiation application.
• Public announcement and CoC formation: within 7 days of admission.
• Resolution plan finalisation (including Swiss challenge): within 90 days of admission.
• NCLT approval: within 30 days of plan submission to NCLT.
• Total: 120 days from admission to plan implementation.

The compressed timeline is the structural feature that distinguishes PPIRP from standard CIRP (180+ days). The compression is operationally demanding but commercially valuable — it preserves business value that erodes during extended insolvency proceedings.

The pre-pack is the IBC's response to the operational reality of MSME distress. The framework preserves what standard CIRP often destroys — operational continuity, supplier relationships, key personnel, the going-concern value.

The continued-operation feature

Section 54H of the IBC permits the corporate debtor to continue managing its affairs and operations during the PPIRP, subject to the supervision of the Resolution Professional. The existing board remains in office; the management continues to operate; the Resolution Professional supervises but does not displace the management.

This is a structural departure from standard CIRP, in which the IRP or RP takes over management of the corporate debtor under Section 17. The continuity feature is intentionally preserved for MSMEs, where the operational know-how, customer relationships, and supplier arrangements are typically embodied in the existing management.

The Resolution Professional's role under PPIRP is to monitor compliance, validate creditor claims, oversee the resolution plan process, and ensure that the corporate debtor's affairs are not conducted to the detriment of creditors. The Resolution Professional reports to the CoC and acts within parameters set by the CoC.

The interaction with standard CIRP

Where the PPIRP fails — by failure to approve a resolution plan within 90 days, failure to implement the plan, or failure of the underlying premise (such as discovery that the corporate debtor is not in fact an MSME) — the proceeding can be converted to standard CIRP under Section 54N.

The conversion preserves the work done in PPIRP — the public announcement, claims received, CoC formation. The proceeding continues as standard CIRP from the point of conversion, with the timeline reset to the standard CIRP framework.

The take-up question

The PPIRP, since its introduction in 2021, has had relatively modest take-up. As of the current position, the number of PPIRP cases admitted by the NCLT is in the dozens — small relative to the standard CIRP caseload. The reasons for the slow take-up include the limited eligibility (MSMEs only), the requirement of pre-negotiation with financial creditors (which can be operationally difficult for MSMEs without organised credit relationships), and the relatively new nature of the framework.

The government has, in recent years, indicated an intention to extend the PPIRP framework beyond MSMEs to broader categories of corporate debtors. Any such extension would substantially increase the framework's significance.

Working observations

Three observations from current practice. First: the pre-negotiation phase is the foundation of a successful PPIRP. The corporate debtor must, before initiation, secure the consent of unrelated financial creditors representing 66% by value, and must have a base resolution plan that is commercially viable. Without this groundwork, the PPIRP collapses at the threshold.

Second: the Section 240A exclusion from Section 29A(c) is the principal reason MSMEs use the PPIRP. The framework permits existing promoters — who are typically disqualified under standard CIRP from submitting resolution plans for NPA-classified accounts — to participate in the resolution. The consequence is that PPIRP frequently produces promoter-led resolutions that would not be possible under standard CIRP.

Third: the 120-day timeline is operationally demanding. The corporate debtor, the Resolution Professional, the CoC and the NCLT must all work within compressed timelines. Pre-pack matters that are not professionally managed from initiation tend to overrun, with conversion to standard CIRP as the practical consequence.