Pre-Packaged Insolvency for MSMEs: Sections 54A to 54P of the IBC

The pre-packaged insolvency resolution process is the Insolvency and Bankruptcy Code's restructuring route for micro, small and medium enterprises. It sits in Chapter III-A, Sections 54A to 54P, inserted with effect from 4 April 2021. Unlike a corporate insolvency resolution process, it starts with a deal already on the table: the company and its unrelated financial creditors agree in advance on a resolution professional and the company prepares a base resolution plan before anything is filed. The board stays in charge, the NCLT admits the application within fourteen days, and the statute allows 120 days to finish.

The Insolvency and Bankruptcy Code (Amendment) Act 2026 changed the pre-pack in force from 26 May 2026, most visibly by lowering the creditor approvals needed to begin from sixty-six to fifty-one per cent. This note follows the process from eligibility to the NCLT's order, stating the law as amended.

Key points

• Only a corporate debtor classified as an MSME under Section 7(1) of the Micro, Small and Medium Enterprises Development Act 2006 can use it, and the minimum default is ten lakh rupees.
• Unrelated financial creditors holding fifty-one per cent in value must approve both the proposed resolution professional and the filing (sixty-six per cent before 26 May 2026).
• The board keeps management; the resolution professional monitors, and management can be shifted to the professional on proof of fraud or gross mismanagement.
• The company's base plan may be approved directly only if it pays operational creditors in full; otherwise it must face competing plans.
• The process ends in 120 days, with the approved plan due before the NCLT within 90.

Which companies can use the pre-packaged insolvency process?

Section 54A(1) confines the process to a corporate debtor classified as a micro, small or medium enterprise under Section 7(1) of the MSMED Act 2006, under which enterprises are classified by notification, by reference to investment in plant and machinery or equipment and to turnover. Section 54A(2) adds that the debtor must have committed a default "referred to in section 4". The second proviso to Section 4 allows a separate threshold for Chapter III-A, and notification S.O. 1543(E) dated 9 April 2021 fixed it at ten lakh rupees, against the one crore rupees that applies to a CIRP.

The debtor must also satisfy every condition in Section 54A(2):

• it has not undergone a pre-pack, or completed a CIRP, in the three years before the initiation date;
• it is not undergoing a CIRP;
• no liquidation order has been passed against it under Section 33;
• it is eligible under Section 29A to submit a resolution plan;
• its unrelated financial creditors have proposed and approved the resolution professional;
• a majority of its directors or partners have made the required declaration; and
• its members have passed a special resolution, or three-fourths of its partners a resolution, approving the filing.

The Section 29A condition deserves attention because the corporate debtor is itself treated as a resolution applicant (Explanation I to Section 54K). A promoter who is a wilful defaulter, for example, makes the company ineligible through Section 29A(b) read with clause (j), which extends the disqualifications to connected persons such as the applicant's promoters — see the note on the wilful defaulter declaration. Section 240A(1) softens the position for MSMEs: clauses (c) (a non-performing account for a year or more) and (h) (an invoked and unpaid guarantee for a corporate debtor in insolvency) of Section 29A do not apply to a resolution applicant in an MSME's CIRP or pre-pack.

The 2026 Act also amends Section 54A(2)(a) and (b) to bar a pre-pack for a company that has recently undergone, or is undergoing, the new creditor-initiated process. Those amendments have not been notified, and will operate only when the creditor-initiated insolvency resolution process comes into force.

What creditor approvals are needed before filing?

Two approvals from financial creditors who are not related parties are required, and since 26 May 2026 both need fifty-one per cent in value of the financial debt due to such creditors:

• The resolution professional. Under Section 54A(2)(e), unrelated financial creditors propose the name of the insolvency professional, and those holding at least fifty-one per cent in value approve the proposal. Regulation 14 of the IBBI (Pre-packaged Insolvency Resolution Process) Regulations 2021 requires the company to convene meetings of those creditors on at least five days' notice, and lets creditors holding at least ten per cent of the value of their financial debt propose names.
• The filing. Under Section 54A(3), the company obtains approval for filing the application from unrelated financial creditors holding fifty-one per cent in value.

Before seeking the filing approval, Section 54A(4) requires the company to give those creditors the directors' declaration, the special resolution, a base resolution plan conforming to Section 54K, and any other specified information. The declaration under Section 54A(2)(f) must state that the application will be filed within a definite period not exceeding ninety days, that the process is not being initiated to defraud any person, and the name of the approved professional. Where the company has no unrelated financial creditors, the provisos to Sections 54A(2)(e) and 54A(3) leave the approvals to persons specified by the Board, and Regulation 14(8) turns to unrelated operational creditors.

From the date of the first approval, Section 54B requires the proposed professional to report whether the company meets Section 54A and whether the base plan conforms to Section 54A(4)(c), and to file reports with the Board. That duty lapses if the company does not file within the declared period.

How is the application filed and admitted?

Under Section 54C the corporate applicant files the application with the NCLT. Since 26 May 2026, Section 54C(3) simply requires it to furnish "such information as may be specified", and Regulation 18 (substituted with effect from 2 June 2026) lists the directors' declaration, the resolution, proof of the fifty-one per cent approval, the professional's consent and Section 54B report, audited financial statements for the last two financial years, and provisional statements for the current year up to the date of the declaration.

Section 54C(4) requires the NCLT to admit the application within fourteen days if it is complete, or reject it if incomplete after giving seven days to rectify. The process commences on admission. Where a creditor's CIRP application is already pending, Section 11A decides priority: a pre-pack application filed within fourteen days of a pending Section 7, 9 or 10 application is decided first; one filed later waits for the CIRP application to be decided. A creditor considering a Section 9 application against an MSME should keep that fourteen-day window in mind.

What happens on admission?

With the admission order, Section 54E requires the NCLT to declare a moratorium for the purposes of Section 14(1) read with Section 14(3), to appoint the approved professional (or a Board nominee if disciplinary proceedings are pending against that person), and to direct a public announcement, which Regulation 19 requires within two days. The moratorium lasts until the process period ends, and works as described in the note on the Section 14 moratorium.

Within two days of commencement, Section 54G requires the company to give the professional a list of claims with details of creditors, security interests and guarantees, and a preliminary information memorandum, while Section 54K(1) requires the base plan to be submitted in the same window. Promoters, directors and partners who submitted or authorised either document are liable under Section 54G(2) to compensate anyone who suffers loss from an omission or misleading information, unless it was submitted without their knowledge or consent.

The committee of creditors must be constituted within seven days of commencement and meet within seven days after that (Section 54-I).

Who controls the company during a pre-pack?

The board. Section 54H keeps management with the directors or partners, subject to specified conditions, and obliges them to protect the value of the company's property and manage it as a going concern. Section 54F makes the professional a monitor: confirming the list of claims, maintaining an updated list, constituting and convening the committee, preparing the information memorandum, informing the committee of any breach by the board, and filing avoidance and fraudulent or wrongful trading applications. The professional has access to the company's books, to information utility records and to records with auditors and authorities. The substituted Section 54F(5) now requires anyone who is or has been personnel of the company or its promoter, anyone associated with its management and anyone engaged under a contract for service to cooperate, with Section 19(2) and (3) available to enforce it.

That arrangement can be reversed. Under Section 54J, if the committee resolves by sixty-six per cent to vest management in the professional, and the NCLT finds that the affairs have been conducted fraudulently or that there has been gross mismanagement, it vests management in the professional and applies the CIRP provisions on management for the rest of the process.

How is the base resolution plan considered?

Section 54K is the commercial core. The committee may give the company a chance to revise the base plan. It may then approve the base plan for submission only if it does not impair the claims of operational creditors — and Explanation II treats a claim as impaired wherever the plan does not pay the confirmed claim in full.

If the committee does not approve the base plan, or the plan impairs operational creditors' claims, Section 54K(5) requires the professional to invite competing resolution plans. The committee evaluates them and selects one. If, on criteria it has laid down, the selected plan is significantly better than the base plan, it may go forward for approval; if not, the two compete in the specified manner and one is selected. Every approval requires sixty-six per cent of the voting share, after considering feasibility, viability and the manner of distribution, taking into account the Section 53(1) order of priority and the priority and value of secured creditors' security interests.

Where the company's own plan impairs any claim, Section 54K(14) allows the committee to require the promoters to dilute their shareholding, voting or control rights; a plan approved without such dilution needs recorded reasons. Plans must conform to Section 30(1) and (2), so the protections for operational and dissenting financial creditors in Section 30(2) apply.

What does the NCLT do with the approved plan?

Under Section 54L(1), the NCLT approves the plan within thirty days if it meets Section 30(2) and has provisions for effective implementation. Since 26 May 2026, Section 54L(2) gives the approval order the effect of Section 31(1), (3), (4), (5) and (6), so the protection of licences and the statutory extinguishment of prior claims in Section 31(5) and (6) now reach a pre-pack plan. A new proviso to Section 54L(3) allows the NCLT to give the committee notice to rectify defects before rejecting a plan; a rejection leads to termination under Section 54N.

Section 54L(4) is the safeguard against a pre-pack being used to recycle control. Where management had been vested in the professional under Section 54J and the approved plan would not change management or control to a person who was not a promoter or in management, the NCLT must reject the plan, terminate the process, pass a liquidation order and treat the pre-pack costs as liquidation costs. An appeal against approval lies on the grounds in Section 61(3), by Section 54M.

How can a pre-pack end without a plan?

• Termination. Under Section 54D(3), if no plan is approved within ninety days the professional must apply for termination on the next day; under Section 54N(2) the committee can also decide by sixty-six per cent to terminate. The NCLT terminates within thirty days, provides for continuation of avoidance proceedings, and the company bears the costs. If management had been vested in the professional, termination is accompanied by a liquidation order, which since 2026 carries the new liquidation moratorium and appointment of a liquidator. That process is described in Liquidation under the IBC after the 2026 Amendment.
• Conversion to a CIRP. Under Section 54-O, the committee may resolve by sixty-six per cent, before a plan is approved, to initiate a CIRP. The NCLT's order is deemed an admission under Section 7, the pre-pack professional may become the interim resolution professional, and the avoidance look-back periods are reckoned from the pre-pack commencement date, with the duration of the pre-pack counted in.

What penalties apply in a pre-pack?

Section 67A allows a penalty of one lakh to one crore rupees on an officer who manages the company with intent to defraud creditors after commencement. Section 77A makes knowingly false information in the application, the list of claims or the information memorandum, and deliberate contravention of Chapter III-A by a director or partner, offences carrying imprisonment of three to five years or a fine of one lakh to one crore rupees, or both. Section 74, which Section 54P(1)(f) and (g) adapted to the pre-pack, was omitted on 26 May 2026; its replacement, the civil penalty regime in Section 67B, sits in Chapter VI, which Section 54P(1) applies to the pre-pack with necessary changes, though Section 67B's text refers to Section 14 and to plans binding under Section 31.

A note on scope

This article is general information on Chapter III-A of the Insolvency and Bankruptcy Code 2016 as amended, and is not legal advice. Much of the procedure is in the IBBI regulations, which were amended in 2026 and should be checked in their current form. The wider amendment is mapped in IBC (Amendment) Act 2026: What Changed, and an MSME's own route to recover delayed payments is in the note on the MSME Facilitation Council.

The related practice areas are MSME legal matters and NPA resolution. Enquiries may be directed through the contact page.

Related reading: IBC Guide | One-Time Settlement | Legal Glossary