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How resolution ‘pre-packs’ for MSMEs can speed up insolvency cases?

Topics Covered: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

How resolution ‘pre-packs’ for MSMEs can speed up insolvency cases?


Context:

The Insolvency and Bankruptcy Code (Amendment) Bill, 2021 was recently passed by Lok Sabha. It has proposed ‘pre-packs’ as an insolvency resolution mechanism for Micro, Small and Medium Enterprises (MSMEs).

 

What are ‘pre-packs’?

  • A pre-pack is an agreement for the resolution of the debt of a distressed company through an agreement between secured creditors and investors instead of a public bidding process.
  • This system of insolvency proceedings has become an increasingly popular mechanism for insolvency resolution in the UK and Europe over the past decade.

In India’s case, such a system will require that financial creditors agree on terms with potential investors and seek approval of the resolution plan from the National Company Law Tribunal (NCLT).

  1. The approval of at least 66 per cent of financial creditors that are unrelated to the corporate debtor would be required before a resolution plan is submitted to the NCLT.
  2. The NCLTs will be required to either accept or reject an application for a pre-pack insolvency proceeding before considering a petition for a the Corporate Insolvency Resolution Process (CIRP).
  3. The pre-pack is limited to a maximum of 120 days with only 90 days available to stakeholders to bring a resolution plan for approval before the NCLT.

 

What is the need for pre-packs?

Slow progress in the resolution of distressed companies has been one of the key issues raised by creditors regarding the Corporate Insolvency Resolution Process (CIRP) under the IBC.

  • At the end of March 2021, 79 per cent of the 1,723 ongoing insolvency resolution proceedings had crossed the 270-day threshold.
  • A major reason for the delays is the prolonged litigation by erstwhile promoters and potential bidders.

 

What next?

The pre-pack mechanism is effective in arriving at a quick resolution for distressed companies, and that the regime should be rolled out to all corporations over time as legal issues are settled through case law.

 

Insta Curious: 

Do you know the differences between insolvency and bankruptcy? Reference: here

Do you know about Keep & Pay? Read Here (Topic related to Bankruptcy)

 

InstaLinks:

Prelims Link:

  1. What is insolvency and bankruptcy?
  2. Various institutions established under the IBC code.
  3. NCLT- composition and functions.
  4. What are debt recovery tribunals?
  5. Sections 7, 9 and 10 of IBC.
  6. Threshold for invoking insolvency under IBC.
  7. Composition of Insolvency and Bankruptcy Board.

Mains Link:

Discuss how suspension of initiation of fresh insolvency proceedings will help shield companies impacted by the outbreak of Covid-19.

Sources: Indian Express.