Pre-packaged Insolvency for MSMEs: Sections 54A to 54P

A pre-packaged insolvency is one in which the debtor and its main creditors agree on the outline of a resolution before going to the tribunal, so that the formal process mainly confirms and tests that agreement. India introduced a pre-packaged insolvency resolution process for micro, small and medium enterprises in April 2021, as businesses emerged from the pandemic. Unlike the ordinary process, the existing management stays in control and proposes a base plan. This note explains the eligibility rules, the steps, the timelines and the safeguards.

1. Background

• Introduction. Chapter III-A, sections 54A to 54P, was inserted by an ordinance of 4 April 2021, replaced by the IBC (Amendment) Act, 2021, together with the Pre-packaged Insolvency Resolution Process Regulations, 2021.
• Reasons. MSMEs had been shielded by the one crore threshold and section 10A, but needed a quick, low cost route to restructure their debts; the ordinary process was too long and expensive for them, and its creditor-in-control model often led to liquidation of small businesses whose value lay in their promoters.
• Hybrid design. The process combines an informal, out-of-court negotiation with a short formal stage before the NCLT, giving the resulting plan binding force and a moratorium.

2. Eligibility, Section 54A

Figure 1: Who can use the pre-packaged process

• Threshold. Section 4 allows a separate minimum default for pre-packs, not exceeding one crore rupees, and ten lakh rupees was notified in April 2021.
• Resolution professional. Financial creditors who are not related parties and hold at least ten per cent of the financial debt propose the name of the resolution professional.
• Creditor approval. Unrelated financial creditors holding at least 66 per cent in value of the financial debt due to them must approve the proposed professional and the filing of the application.
• Debtor's documents. Before seeking that approval, the corporate debtor must provide a declaration of its directors or partners that the application will be filed within the stated time and that the process is not being used to defraud anyone, the special resolution of its members, and a base resolution plan.
• Section 240A. For MSMEs, clauses (c) and (h) of section 29A do not apply, so promoters whose accounts are non-performing or who gave guarantees may still propose a plan (Topic 38)

3. The Process

Figure 2: Steps in the pre-packaged process

• Application and admission, section 54C. The corporate debtor applies to the NCLT, which must admit or reject within fourteen days, giving seven days to cure defects; the process commences on admission.
• Moratorium. The NCLT declares a moratorium and appoints the resolution professional in the admission order (section 54E)
• Debtor in possession. The board of directors or partners continue to manage the business, but under the supervision of the resolution professional, who monitors the management and the affairs of the debtor.
• Loss of control. If the affairs of the debtor are being conducted fraudulently or with gross mismanagement, the committee of creditors may, by a 66 per cent vote, resolve to vest management in the resolution professional, or to terminate the pre-pack and seek an ordinary CIRP.
• Base plan. The corporate debtor submits the base resolution plan to the resolution professional within two days of commencement, and the plan is placed before the committee of creditors.

4. Approval of the Plan, Section 54K

• Approval of the base plan. The committee of creditors may approve the base plan by a vote of at least 66 per cent, provided it does not impair the claims of operational creditors.
• Swiss challenge. If the base plan is not approved, or if it impairs operational creditors' claims, the resolution professional may invite competing resolution plans; a competing plan is selected only if it is significantly better than the base plan, and the corporate debtor may be given an opportunity to improve its plan.
• Submission and NCLT approval. The approved plan must be submitted to the NCLT within ninety days of commencement, and the NCLT decides within thirty days, so that the process is completed within 120 days (sections 54D and 54L)
• Rejection and termination. If no plan is approved in time, the resolution professional applies for termination of the process; rejection of the plan may also lead to termination and liquidation.
• Appeal. Orders may be appealed under section 54M on the grounds in section 61(3)

5. Related Provisions

• Section 11. Clause (aa) bars creditors from initiating CIRP against a debtor undergoing a pre-pack, and clause (ba) bars a debtor whose pre-pack plan was approved in the preceding twelve months from initiating CIRP (Topic 16)
• Section 65. Penalises fraudulent or malicious initiation of a pre-pack, or initiation with intent to defraud (Topic 17)
• Sections 67A and 77A. Penalise fraudulent management of the corporate debtor during the pre-pack and offences related to the process.

Figure 3: Pre-pack and CIRP compared

6. Use in Practice

Despite its promise, the pre-pack has been used in only a small number of cases. Reasons commonly given include the requirement of consent from 66 per cent of unrelated financial creditors before filing, the reluctance of banks to accept haircuts proposed by promoters, the costs of the process for small businesses and limited awareness. Proposals to extend pre-packs to larger companies were considered by the government, but the 2026 Amendment instead introduced a creditor-initiated process for such cases (Topic 62).

7. Frequently Asked Questions

Who manages the company during a pre-pack?

The existing board or partners, under the supervision of the resolution professional. Management can be shifted to the professional only if the committee of creditors, by 66 per cent, finds fraud or gross mismanagement.

Can a large company use the pre-packaged process?

No. Section 54A confines it to corporate debtors classified as micro, small or medium enterprises under the MSMED Act, 2006.

What is the base resolution plan?

The plan prepared by the corporate debtor itself, usually proposing how its promoters will continue the business and repay creditors. It is shared with creditors before they approve the filing and is the starting point for the committee of creditors.

8. Related Topics

• Topic 14: Section 10. Voluntary CIRP by the corporate debtor.
• Topic 62: Creditor-Initiated Insolvency Resolution Process. The 2026 framework.
• Topic 84: CIRP vs Pre-pack vs Creditor-Initiated Process. A comparison.