Pre-Packaged Insolvency for MSMEs: How the Pre-Pack Works

What is pre-packaged insolvency?

A pre-pack is an insolvency process in which the deal is put together before the court is involved. The company's promoters prepare a base resolution plan, show it to the financial creditors, obtain their approval to start the process, and agree on the insolvency professional who will act as resolution professional. Only then does the company apply to the NCLT. Once admitted, the company has a moratorium, the resolution professional supervises, the committee of creditors votes on the plan, and the NCLT approves it.

The central difference from the ordinary corporate insolvency resolution process (CIRP) is control. In a CIRP, the board is suspended on admission. In a pre-pack, under section 54H, the board continues to manage the company's affairs, and the resolution professional's role is to confirm claims, monitor management and run the process. This is what lawyers call a debtor-in-possession model. The other difference is speed: because the plan is negotiated in advance, the Code allows 120 days from admission to completion.

Pre-packs are available only to companies and LLPs that are MSMEs. A sole proprietorship or an ordinary partnership firm is not a corporate debtor under the Code and cannot use it, even if it is a registered MSME. The individuals behind such businesses are dealt with, if at all, under the separate provisions for individuals and partnership firms.

Which MSMEs can use a pre-pack?

Section 54A sets the conditions. The company must be classified as a micro, small or medium enterprise under section 7(1) of the MSMED Act 2006, which in practice means a valid Udyam registration within the current investment and turnover limits, which were revised in 2025. It must have committed a default of at least ₹10 lakh, the threshold the government has notified for pre-packs, as against ₹1 crore for an ordinary CIRP.

The company must not have undergone a pre-pack, or completed a CIRP, in the three years before the application. It must not be undergoing a CIRP, and no liquidation order must have been passed against it. Under the 2026 amendment, a pre-pack application also cannot be filed or admitted while a creditor-initiated insolvency resolution process is running against the company under the new Chapter IV-A. And the company must be eligible to submit a resolution plan under section 29A, read with section 240A, which relaxes some of the section 29A bars for MSMEs.

That last relaxation is important. Section 29A ordinarily disqualifies a promoter whose company's account has been a non-performing asset for a year or more. Section 240A disapplies that clause, and the clause relating to guarantors, for MSMEs. So a promoter whose loan account has been an NPA for some time is not shut out of a pre-pack for that reason alone. Other disqualifications in section 29A, such as wilful defaulters and persons convicted of certain offences, still apply.

Pre-pack, ordinary CIRP or a settlement: how they compare

A pre-pack is one of several ways for a stressed MSME to deal with its debts. This table sets out the practical differences.

The key sections in Chapter III-A

What must be done before filing?

Most of the work in a pre-pack happens before anyone goes to the NCLT. The company first prepares a base resolution plan: how much each creditor will be paid, when, from what source, and what happens to the business and its management. Section 54A requires the company to give this plan to the financial creditors before seeking their approval. Creditors are asked to approve two things: the filing of the application, and the name of the insolvency professional who will act as resolution professional. Approval is needed from unrelated financial creditors holding at least 66% in value of the financial debt owed to such creditors.

The company also needs internal approvals. A majority of the directors must sign a declaration that the company will file within a stated period of not more than 90 days, that the pre-pack is not being started to defraud anyone, and naming the approved insolvency professional. The shareholders must pass a special resolution approving the filing, or, in an LLP, at least three-fourths of the partners must approve. The insolvency professional, once approved, prepares a report confirming that the company meets the eligibility conditions, which is filed with the IBBI and with the application.

When Advocate B.K. Singh is asked whether a company can use a pre-pack, the first thing he checks is the creditor list: who the financial creditors are, which of them are related parties, and whether the unrelated ones holding 66% of that debt will actually sign before filing. If the company's only significant lender is a public sector bank that will not commit in advance, the rest of the analysis often does not matter.

Documents for a pre-pack application

The application is made in the form prescribed under the Application to Adjudicating Authority Rules, with the documents that section 54C and the IBBI's pre-pack regulations require. Ask us for the current format; the list below shows what to start assembling.

How a pre-pack runs, from admission to approval

Once the NCLT admits the application, the Code sets short time limits. This is the sequence in outline.

1. Admission and moratorium

   The NCLT admits or rejects the application within 14 days. The date of admission is the pre-pack commencement date, and a moratorium applies from that date.

2. Claims list and information memorandum

   Within two days of commencement, the company submits to the resolution professional a list of claims with creditor details, a preliminary information memorandum and the base resolution plan.

3. Committee of creditors

   The resolution professional confirms the claims and constitutes the committee of creditors within seven days of commencement. Its first meeting is held within seven days of its constitution.

4. Consideration of the base plan

   The committee considers the base plan and may ask the company to revise it. If the plan does not impair operational creditors' claims, the committee can approve it by 66% of the voting share.

5. Competing plans if needed

   If the committee does not approve the base plan, or the plan impairs operational creditors' claims, the resolution professional invites competing plans, and the committee compares them with the base plan before choosing.

6. Plan to the NCLT

   The plan approved by the committee is submitted to the NCLT within 90 days of commencement.

7. NCLT approval

   The NCLT approves the plan within 30 days if it meets section 30(2) and can be implemented. The plan then binds the company, its creditors, guarantors and other stakeholders.

These limits are tight on paper. In practice, the NCLT's own listing delays can stretch them, and a company that is not ready on day one will struggle to meet the 90-day mark for submitting the plan.

What makes a base resolution plan acceptable to creditors?

Creditors approve a plan when it gives them more, with more certainty, than the realistic alternatives. The alternatives are a CIRP, which may end in liquidation, or continued recovery through the DRT and SARFAESI. A base plan should therefore show the liquidation value and the fair value of the company, and explain why the plan offers more than what creditors would get in liquidation. A plan that offers financial creditors less than liquidation value will not pass, and should not.

The plan should be specific about money: amounts for each class of creditor, payment dates, the source of funds, and what security creditors keep until they are paid. Upfront payments carry much more weight than long instalment schedules. New money from promoters or an investor is more persuasive than a promise to pay from future profits. If the plan keeps the existing promoters in control, creditors will want to understand why that serves them, and they may ask the promoters to dilute their shareholding or bring in fresh equity.

The plan must also meet section 30(2): it must provide for payment of the process costs, give operational creditors at least what they would get in liquidation, provide for its management and implementation, and not contravene any law. A plan that fails any of these requirements will be rejected by the NCLT even if the committee approved it.

What happens to suppliers and other operational creditors?

Operational creditors, such as suppliers, contractors and landlords, have no vote in the committee, but the pre-pack gives them a specific protection. The committee can approve the company's base plan directly only if it does not impair operational creditors' claims, which in practice means it pays their confirmed claims in full. If the base plan pays operational creditors less, the resolution professional must invite competing plans, and the base plan has to compete against them.

This mechanism, often called a Swiss challenge, is meant to test the base plan in the market. Prospective resolution applicants submit their plans, the committee compares them, and the base plan's proponent can be given a chance to improve its offer. The committee then chooses the plan that serves creditors better. For a promoter, this means that a base plan that cuts suppliers' dues invites outsiders to bid for the company.

For suppliers, the practical lesson is to file and document claims carefully when a pre-pack begins, as in a CIRP. The claims process is lighter, because the company itself submits the list of claims, but a supplier who disagrees with the amount shown should take it up with the resolution professional at once. Our post on filing your claim with the resolution professional covers what proof to keep ready.

Who runs the business during a pre-pack?

The board does. Section 54H keeps management with the company's directors or partners, and requires them to protect the value of the company and manage its operations as a going concern. Employees, customers and suppliers continue to deal with the same people. That continuity is the single biggest advantage of a pre-pack for a small business.

The resolution professional supervises. The professional confirms claims, monitors the management, attends board meetings, can access the company's books and records, and must report to the committee any breach by the management of its obligations. Certain significant decisions need the committee's prior approval, in the same way as in a CIRP. The professional can also look back over the company's transactions and must file applications to reverse preferential, undervalued or fraudulent transactions where they are found.

Control can be taken away. Under section 54J, the committee can resolve by 66% of the voting share to ask the NCLT to vest management in the resolution professional, and the NCLT can do so where there is fraud or gross mismanagement. Promoters who treat a pre-pack as a shield while stripping assets lose control, and in that case a failed pre-pack ends in liquidation.

The moratorium in a pre-pack

On admission, section 54E requires the NCLT to declare a moratorium, applying section 14 with modifications. The effect is the same in substance as in a CIRP: suits and proceedings against the company stop, its assets cannot be transferred or charged outside the ordinary course of business, secured creditors cannot enforce security against the company, and landlords and lessors cannot recover property it occupies. Our post on what the section 14 moratorium stops and what continues explains each of these.

The moratorium does not protect promoters personally. Banks can continue against personal guarantors, and section 138 cases against directors and signatories continue. For many MSMEs, where the promoter has guaranteed every loan and mortgaged the family home, that limits what a pre-pack can achieve. A plan that settles the company's debts should also deal expressly with what happens to the guarantees once creditors are paid, as our post on personal guarantor insolvency explains.

The moratorium runs from admission until the plan is approved or the process is terminated. If the pre-pack is converted to an ordinary CIRP, a fresh moratorium under section 14 applies to the CIRP.

What if the pre-pack fails?

A pre-pack can fail in three ways. No plan is submitted within 90 days, and the resolution professional must apply to terminate. The committee decides, by 66% of the voting share, to terminate the process before a plan is approved. Or the NCLT rejects the plan because it does not meet the legal requirements. In each case, under section 54N, the NCLT terminates the process and provides for any pending avoidance proceedings, and the company bears the process costs.

Termination does not automatically mean liquidation. The company returns to its pre-pack position, and creditors are free to pursue their remedies, including a section 7 or 9 petition. Liquidation follows directly only where management had already been taken away from the board under section 54J for fraud or gross mismanagement. The committee also has a middle option under section 54O: before a plan is approved, it can resolve by 66% to convert the pre-pack into an ordinary CIRP. The NCLT then starts a CIRP, the resolution professional usually becomes the interim resolution professional, and the order is treated as an admission under section 7.

For promoters, this is the real risk. A pre-pack that fails because the promoters could not deliver the money in their plan may lead quickly to an ordinary CIRP, in which they lose control from day one. Do not start a pre-pack with a plan you cannot fund.

Why so few pre-packs, and is one right for your company?

Only a small number of pre-packs have been filed since 2021. The main reasons are practical. Banks, especially public sector banks, find it hard to commit in advance to a haircut through their internal approval processes. Many MSMEs have one dominant lender, and if that lender will not sign, nothing moves. The process also involves insolvency professional fees, valuations and NCLT filings, which are significant for a small company. And a promoter who can get creditors to agree a haircut can sometimes achieve the same thing more cheaply through a one-time settlement or restructuring outside the Code.

A pre-pack makes sense in particular situations: where there are several financial creditors and one or two are holding out, because the approved plan binds dissenters; where operational creditors or other claimants threaten to disrupt a deal, and a moratorium is needed; or where a new investor wants the certainty and finality that only an NCLT-approved plan gives. If the company has only one lender and that lender will agree a settlement, a pre-pack may be unnecessary. Our posts on MSME loan restructuring and protection from recovery and one-time settlement with a bank cover those routes.

A point Advocate B.K. Singh often makes to MSME promoters is that the pre-pack question should be asked early, while the company still has a business worth saving and before a lender files under section 7. Once an ordinary CIRP is admitted, the pre-pack is no longer available, and the promoters' options narrow to a resolution plan under section 240A or a section 12A withdrawal.

How the 2026 amendment affects MSME restructuring

The 2026 amendment to the Code did not rewrite the pre-pack chapter, but it changed the surroundings. It introduced a creditor-initiated insolvency resolution process in Chapter IV-A, which notified financial creditors can start against a corporate debtor, with management also remaining with the debtor during the process. A company that has undergone a pre-pack in the previous three years is not eligible for the creditor-initiated process, and no pre-pack application can be filed or admitted while a creditor-initiated process is running.

The amendment also tightened admission timelines for ordinary petitions, requiring the NCLT to decide section 7 petitions within 14 days, and introduced penalties for frivolous proceedings and for breaches of a moratorium. For an MSME under financial stress, the practical effect is that there is less time between a lender's default notice and the loss of control. That makes early planning more valuable, whether the plan is a pre-pack, a negotiated settlement or a restructuring.

The details of the new creditor-initiated process are still being worked out through regulations and early cases. If a lender has indicated that it will use it against your company, take advice on how it interacts with a pre-pack before deciding which route to pursue.

Mistakes MSMEs make with pre-packs

• Starting too late. A pre-pack is not available once a CIRP is admitted. Promoters who wait for the bank's section 7 petition lose the option.
• Assuming creditors will sign. The 66% approval of unrelated financial creditors is needed before filing. Without it, there is no application.
• An unfunded base plan. Creditors and the NCLT look at where the money comes from. A plan that depends on future profits alone rarely passes.
• Cutting suppliers to save money. A base plan that impairs operational creditors' claims triggers competing plans. Paying suppliers in full keeps the base plan's path simpler.
• Ignoring personal guarantees. The moratorium does not protect promoters. Deal with the guarantees in the plan, or expect lenders to pursue them.
• Not being an eligible entity. Proprietorships and ordinary partnership firms cannot use a pre-pack. Check the company's structure and Udyam registration first.
• Treating debtor-in-possession as freedom. The resolution professional monitors management, and fraud or gross mismanagement can lead to loss of control and liquidation.

Is your company ready for a pre-pack?

• The company or LLP has a valid Udyam registration as a micro, small or medium enterprise
• There is a default of at least ₹10 lakh
• No pre-pack, and no completed CIRP, in the last three years
• No CIRP, liquidation or creditor-initiated process pending
• Promoters are not disqualified under section 29A as relaxed by section 240A
• Unrelated financial creditors holding 66% of the financial debt to them are likely to sign
• An insolvency professional is identified and willing to act
• A base resolution plan with a clear source of funds is drafted
• Liquidation value and fair value estimates are available or commissioned
• Board and shareholder approvals can be obtained quickly

Getting advice on a pre-pack

A pre-pack is a corporate, financial and litigation exercise at once. The base plan needs financial modelling and valuation; the approvals need careful corporate documentation; and the NCLT application needs to meet section 54C exactly. Most MSMEs work with their chartered accountant, an insolvency professional and an advocate together, with the advocate handling the legal structure, the creditor documentation and the NCLT stage.

If you want an advocate to look at your company's position and tell you whether a pre-pack is realistic, or whether a settlement, restructuring or other route would serve better, the team of Advocate B.K. Singh at B.K. Singh & Associates can review the papers through our online legal enquiry. Our pages on NCLT practice in Delhi and corporate law explain how we work with companies in this position.