A bankruptcy resolution exercise targeting micro, small and medium enterprises (MSMEs) has failed to take off.

Lenders rue the lack of interest in the pre-packaged insolvency resolution process, which was introduced through the Insolvency and Bankruptcy Code (Amendment) Act, 2021.

They are, however, in favour of the proposed creditor-led resolution approach as an alternative to the corporate insolvency resolution process (CIRP).

Pre-packaged insolvency is aimed towards MSMEs and involves a hybrid resolution process under which in the pre-initiation stage, the corporate debtor and its creditors can explore and negotiate the best way to resolve stress and form a base resolution plan.

But since inception, only eight applications have been filed to initiate pre-pack insolvency of which only six have been admitted.

Of the six, one was withdrawn before resolution and as of May 31, 2023, there were only four remaining cases with one case resolved as per a research document published by the Insolvency and Bankruptcy Board of India in October 2023.

“This special provision is yet to gain momentum. One of the reasons for the low traction is that promoters and directors may not be comfortable in extending powers to resolution professionals as provided by the Code,” said B. Sankar, deputy managing director, stressed assets resolution group, State Bank of India.

“They are also required to furnish a declaration regarding the existence of the transactions of the corporate debtor that may be within the scope of provisions in respect of avoidance transactions. They are hesitant or unable to submit such undertakings, probably knowing well the existence of such transactions,” Sankar said at a CII event here on Saturday.

Avoidable transactions include preferential transactions, undervalued transactions, transactions defrauding creditors and extortionate transactions.

Financial creditors are more optimistic about the proposed creditor-led resolution approach, which could help towards the faster resolution of stressed assets.

In May 2023, an expert committee of the Insolvency and Bankruptcy Board of India (IBBI) came up with a framework for the creditor-led resolution process (CLRP).

A key feature of CLRP as per the proposed framework is that there will be no transfer of management rights to the resolution professional unlike CIRP (corporate insolvency resolution process) and the existing management of the company would be responsible for keeping the company running as a ‘going concern’.

However, in case of mismanagement or fraud, the committee of creditors would be empowered to convert CLRP to CIRP.

“It is expected to help in resolving stressed assets in a more coordinated way within shorter timelines,” Sankar said. The draft CLRP framework proposes the approval of a resolution plan within 120 days with the possibility of a 45-day extension by order of the adjudicating authority.

Sudhakar Shukla, a full-time member, IBBI, who was present at the CII event said CLRP will benefit both MSMEs as well as large corporates.