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Pre-pack under Insolvency and Bankruptcy Code

  • Category
    Economy
  • Published
    13th Apr, 2021

The central government has promulgated an ordinance that allows the pre-packs to be used as an insolvency resolution mechanism for Micro, Small and Medium Enterprises (MSMEs) having defaults up to Rs 1 crore under the Insolvency and Bankruptcy Code.

Context

The central government has promulgated an ordinance that allows the pre-packs to be used as an insolvency resolution mechanism for Micro, Small and Medium Enterprises (MSMEs) having defaults up to Rs 1 crore under the Insolvency and Bankruptcy Code.

About

  • What are pre-packs?
  • A pre-pack is theprocess of debt resolutionof a distressed company by an agreement between secured creditors and investors instead ofa public bidding process.
  • Under this resolution, the company’s business is negotiated with a buyer before the appointment of an insolvency professional. 
  • Pre-pack is a corporate rescue method with both informal (out-of-court) and formal (judicial) insolvency proceedings.
  • It is a hybrid framework, as it empowers stakeholders to resolve the debt issue with the minimum assistance of the State.
  • Under this system, the financial creditors seek approval from the National Company Law Tribunal (NCLT) regarding the resolution plan.
  • NCLT may accept or reject any application
  • The plan has to be approved by a minimum of 66 percent of unrelated financial creditors to the corporate is required before a plan is sent to NCLT.
  • The pre-pack mechanism permits the Swiss challenge for any resolution plans which proved less than full recovery of dues for operational creditors.
  • It will be implemented in parallel to the Corporate Insolvency Resolution Process (CIRP).
  • This system of insolvency proceedings is a popular mechanism for insolvency resolution in the UK and Europe.

Swiss challenge mechanism

  • Under this mechanism, any third party will be permitted to submit the resolution plan for the distressed company.
    • The original applicant would have to either match the improved resolution plan or forego the investment.

What was the earlier process?

  • Corporate Insolvency Resolution Process (CIRP) is a recovery mechanism for creditors under the IBC, 2016.
  • If a corporation becomes insolvent, in this case,a financial creditor, an operational creditor, or the corporate itself may initiate CIRP.

Benefits of pre-packs over the Corporate Insolvency Resolution Process (CIRP)

  • CIRP is said to be a time taking resolution process. In the majority of the cases the threshold of 270-days has been crossed.
  • The prolonged litigations by promoters and potential bidders are said to be the key reason behind the delays.
  • On the other hand, the limit for a pre-pack is 120 days with 90 days available to the stakeholder in bringing the resolution plan to the NCLT.
  • Under the CIRP, a resolution professional takes control of the debtor. On the other hand, the in case of pre-pack the management retains control.

What is the need for the pre-pack plan?

  • Due to the Covid-19 pandemic, the government had suspended the insolvency act. Now as the one-year suspension had come to an end, the government has initiated a pre-pack solution for the debt resolution.
  • The pre-packs will provide MSMEs an opportunity to restructure their liability and to start afresh.
  • It will incorporate the consensual restructuring of debt with lenders.
  • It also ensures adequate protection by errant promoters.

Insolvency and Bankruptcy Code, 2016 (IBC)

  • It is a bankruptcy law of India that seeks to create a single law for insolvency and bankruptcy.

Key Features

Insolvency Resolution

  • The Code outlines separate insolvency resolution processes for individuals, companies, and partnership firms.
  • The process may be initiated by either the debtor or the creditors.
  • ime limit-
    • For companies: 180 days, which may be extended by 90 days
    • For start-ups, small companies, and other companies (with asset less than Rs. 1 crore): 90 days of initiation of request which may be extended by 45 days

Insolvency regulator

  • The Insolvency and Bankruptcy Board of India will oversee the insolvency proceedings in the country.
  • The Board will have 10 members with representatives from the Ministries of Finance and Law, and the Reserve Bank of India.
  • Insolvency professionals
  • The licensed professionals will manage the insolvency process.

Adjudicator:

  • National Company Law Tribunal for Companies and Limited Liability Partnership firms.
  • Debt Recovery Tribunal for individuals and partnerships.
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