28 Jul 2021 Insolvency and bankruptcy (amendment) Bill on pre-pack resolution of MSMEs

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Insolvency and bankruptcy (amendment) Bill on pre-pack resolution of MSMEs

The Bill is set to replace the IBC Amendment Ordinance 2021 promulgated in April which introduced pre-packs as an insolvency resolution mechanism for micro, small and medium enterprises (MSMEs) with defaults up to Rs 1 crore.

Major Provisions of amendment bill:

Distressed corporate debtors (CDs) are permitted to initiate a pre-packaged insolvency resolution process (PIRP) with the approval of two-thirds of their creditors to resolve their outstanding debt under the new mechanism.
CDs are also required to submit a base resolution plan at the time of the initiation of the PIRP.
Unlike in the case of corporate insolvency resolution process (CIRP), debtors remain in control of their distressed firm during the PIRP.
The PIRP also allows for a Swiss challenge to the resolution plan submitted by a CD in case operational creditors are not paid 100 per cent of their outstanding dues. Under the Swiss challenge mechanism, any third party would be permitted to submit a resolution plan for the distressed company and the original applicant would have to either match the improved resolution plan or forego the investment.

Need of Pre-Packs:

CIRP is a time taking resolution. At the end of December 2020, over 86% of the 1717 ongoing insolvency resolution proceedings had crossed the 270-day threshold.
Under the IBC, stakeholders are required to complete the CIRP within 330 days of the initiation of insolvency proceedings.
One of the key reasons behind delays in the CIRPs are prolonged litigations by erstwhile promoters and potential bidders.

Benefits of pre-packs:

Quick resolution:
- It is limited to a maximum of 120 days with only 90 days available to the stakeholders to bring the resolution plan to the NCLT.
- Besides offering a way for MSMEs to restructure their debts, the pre-pack scheme could also reduce the burden on benches of the NCLT by offering a faster resolution mechanism than ordinary CIRPs.
Minimizes Disruptions to the Business: Existing management retains control in the case of pre-packs rather than resolution professionals in CIRP, hence avoids the cost of disruption of business and continues to retain employees, suppliers, customers, and investors.
Addresses the entire liability side: PIRP will help CD to enter into consensual restructuring with lenders and address the entire liability side of the company.

Raising additional capital: Initially CDs may not raise additional capital or debt from Investors or Banks, because of the risk involved in recovering the money being provided by these Investors and lenders.
Small timeline: Resolution Plan under PIRP is 90 days with an additional 30 days to AA (Adjudicating Authority) for support of the scheme. It is challenging for CoC (Committee of Creditors) members to decide on the Base resolution Plan within this short period without any broad parameters on which the Resolution Plan be approved

While the PIRP is a timely effort to protect viable MSMEs, it is likely that operationalizing it only for MSMEs now may just be the first step towards a sound Pre-pack and will lead to a much wider coverage in the future which, like the IBC, is expected to evolve with time and jurisprudence.
The government should consider setting up specific benches of the NCLT to deal with pre-pack resolution plans to ensure that they are implemented in a time-bound manner.

Yojna IAS Current Affairs Team