From Ashes to Assets: Reimagining Phoenixing and Pre-Packs in India’s Insolvency Framework

Insolvency frameworks in India, prior to the 2021 amendment, operated exclusively through the Corporate Insolvency Resolution Process (CIRP). The 2021 amendment introduced the Pre-Packaged Insolvency Resolution Process (PIRP), but its application is restricted to Micro, Small, and Medium Enterprises (MSMEs). A further amendment in 2018 introduced Section 240A of the IBC, exempting promoters of MSMEs from certain disqualifications under Section 29A. This paper examines how this legislative shift, brought in by the 2021 amendment together with the introduction of Section 240A, creates a potential loophole for MSMEs to exploit through phoenix activity. Phoenix activity — which may be technically legal or outright illegal but is commonly associated with the fraudulent re-acquisition of businesses by their own promoters — has created a regulatory space that enables promoters to re-acquire distressed businesses under PIRP with minimal scrutiny, often through undervalued resolution plans.

Part I of the paper argues that, despite the often minimal direct harm from MSME phoenixing given their limited assets and market presence, India’s current complete disregard of this practice is problematic, particularly in light of cases involving larger entities like Essar Steel. This section therefore proposes a tailored regulatory framework for MSME phoenixing, asserting that accommodating controlled phoenixing or sales to connected parties within a broader economic framework can foster long-term wealth creation by supporting the notion of legitimate business failure.

Part II is concerned with the exclusivity of the amendment for MSMEs, rather than a liberal application of pre-packaged insolvency resolution processes to larger corporations as well. While the legislature’s cautious approach stems from the possibility of misuse, market instability given the outsized impact of large corporations, and creditor harm, there is a complete disregard of possible positive outcomes such as job preservation, among others. The paper therefore proposes a carefully structured pre-pack regulatory framework to accommodate the merits of extending pre-packs to larger corporations, exploring how India can implement such a mechanism to harness the economic benefits while also safeguarding creditors and limiting liability evasion. The paper underscores how India’s experience with MSMEs can serve as a regulatory sandbox, drawing inspiration from comparative models from the UK and Australia, where structured oversight of phoenixing — rather than outright prohibition — has proved successful.