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Resolution ‘pre-packs for MSMEs to speed up insolvency cases

  • Posted By
    10Pointer
  • Categories
    Economy
  • Published
    29th Jul, 2021

Context

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

What are ‘pre-packs?

  • A pre-pack is the resolution of the debt of a distressed company by a direct agreement between the secured creditors and the existing owners or outside investors, instead of the public bidding process.
  • Under the system, the financial creditors will agree to terms with the promoters or a potential investor and would seek approval of the resolution plan from the National Company Law Tribunal (NCLT).
  • The approval of at least 66 percent of financial creditors who are unrelated to the corporate debtor would be required before the resolution plan is submitted to
  • The NCLTs can either accept or reject any application for a pre-pack insolvency proceeding before considering a petition for a
  • The pre-pack mechanism also allows for a ‘Swiss challenge’ to the resolution plan that provides less than full recovery of dues for operational creditors.
    • Under the Swiss challenge mechanism, a third party would be permitted to submit the resolution plan for the distressed company, and the original applicant would have to either match the improved resolution plan or forego the investment.
  • This insolvency proceeding system has become increasingly popular for insolvency resolution in the United Kingdom and

How are pre-packs better than the corporate insolvency resolution process (CIRP)?

  • CIRP takes 270 days for the resolution that causes prolonged litigation by erstwhile promoters and potential bidders.
  • While 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.
  • Under this, the existing management retains control in the case of pre-pack while, in the case of CIRP, a resolution professional takes charge of the debtor as a representative of financial creditors to ensures minimal disruption of operations relative to a CIRP.

Corporate insolvency resolution process (CIRP)

  • CIRP is the process of resolving the corporate insolvency of a corporate debtor by the provisions of the Insolvency and Bankruptcy Code, 2016 Code.
  • CIRP may be initiated by a financial creditor under section 7, an operational creditor under section 9 and a corporate applicant of the corporate debtor under section 10 of the Code.
  • Government notification dated 24th March 2020, has increased the minimum amount of default to ? 1 crore.

Significance of pre-packs resolution process

  • The pre-packs are aimed to provide MSMEs with an opportunity to restructure their liabilities and to start with a clean slate.
  • It provides adequate protection to the system to avoid its misuse by firms to avoid making payments to creditors.

Challenges of pre-packs

  • The timeline for the PIRP may be difficult to meet for the lenders and distressed firms also.
  • When a firm restructures its outstanding debt through a PIRP with the existing management retaining control, the NPA status of the company’s account with lenders may not be automatically upgraded under RBI guidelines.
  • The Swiss challenge option is also a challenge as the existing management may create hurdles for an outside investor seeking information to potentially invest in the company.

National Company Law Tribunal (NCLT)

  • The National Company Law Tribunal is a quasi-judicial organisation that adjudicates issues relating to  Indian companies.
  • The tribunal was established under the Companies Act 2013.
  • It was constituted in 2016 by the government on the recommendation of the V. Balakrishna Eradi committee.
  • The NCLT bench is chaired by a Judicial member who is supposed to be a retired or a serving High Court Judge and a Technical member who must be from Indian Corporate Law Service, ICLS Cadre.
  • The decisions of NCLT may be appealed to the National Company Law Appellate Tribunal.