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Govt brings ordinance for pre-packaged insolvency resolution of MSMEs under IBC

The ordinance aims to make insolvency resolution easier, faster and cost-effective for MSMEs using the ‘pre-pack’ process. It will act as an efficient alternative insolvency resolution process for MSMES under the IBC.

April 05, 2021 / 11:19 PM IST

The government has introduced an ordinance for a pre-packaged insolvency resolution process for pandemic-hit micro, small and medium enterprises (MSMEs), which will be completed within 120 days. Moneycontrol has reviewed a copy of the ordinance

The pre-packaged, informal, hybrid and debtor-driven pre-insolvency process, called ‘pre-pack’, will operate under the Insolvency and Bankruptcy Code and is used in overseas jurisdictions like UK, US & Singapore.

“Micro, small and medium enterprises are critical for India’s economy as they contribute significantly to its gross domestic product and provide employment to a sizeable population. It is considered necessary to urgently address the specific requirements of micro, small and medium enterprises relating to the resolution of their insolvency, due to the unique nature of their businesses and simpler corporate structures,” the government ordinance said.

The pre-pack will act as an efficient alternative insolvency resolution process for corporate persons classified as micro, small and medium enterprises under the Insolvency and Bankruptcy Code and ensure quicker, cost-effective and value maximising outcomes for all the stakeholders, in a manner which is least disruptive to the continuity of their businesses and which preserves jobs, the ordinance added.

The Government has taken several measures to mitigate the distress caused by the pandemic, including increasing the minimum amount of default for initiation of corporate insolvency resolution process to Rs 1 crore rupees, and suspending filing of applications for initiation of corporate insolvency resolution process in respect of defaults arising for one year beginning March 25th, 2020.  Such suspension for filing of applications for initiation of corporate insolvency resolution process has ended on March 24, 2021.

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Following are some of the key features of the new pre-pack framework specified in the Ordinance –

  1. Approval required by not less than 66 percent of the financial creditors

  2. Pre-packaged insolvency resolution process to be completed within 120 days

  3. Mgmt of firm to continue to vest in board of directors, subject to conditions

  4. Govt may specify default thresholds ( not more than Rs 1 crore) for pre-pac eligibility ( IBC has threshold of Rs 1 crore and above)

According to L Viswanathan, Partner, Cyril Amarchand Mangaldas, "The Government has cautiously introduced the pre-pack regime only for the MSME sector at this point of time, which is welcome. Depending on the success of the pre-pack regime for the MSME sector, one can expect this regime to be made available for other corporate borrowers.”

Kumar Saurabh, Partner at law firm Khaitan & Co believes the government’s move is  primarily intended to provide quick resolution for MSME companies without having to go through the elaborate insolvency resolution process. “This is primarily designed as a creditor in control and debtor in possession model,” he says.

According to the Ordinance, the resolution professional or RP would be involved primarily in running the resolution process and the management of the company will remain with the promoters/erstwhile shareholders during pre-pack process. The RP would be an invitee to board meetings and meetings of its sub-committees. However key decisions like raising financing, sale of assets would require the approval of the company of creditors.

Saurabh has a word of caution here. “The resolution plan required to be in place before triggering the process is required to be put through Swiss auction in case it contemplates any haircut. This is potentially the most critical aspect of the whole process. In order to get a third party to bid for a company in distress, availability of information would be most crucial. It would be important to see if the RP can ensure free flow of information for third parties to bid, if he is not in control/management of the company during the pre-pack process,” he says.

The Swiss Challenge is a unique method which allows a seller to blend the features of both an open auction and a closed tender to discover the best price for an asset. Applied to an IBC scenario, a Swiss Challenge method may involve two rounds of bidding. For instance, if X wins the first round with a bid of Rs 10,000 crore, this will be disclosed to all parties and a second round of bids will be invited. If Y bids Rs 10,500 crore, X will be given a second chance to match it. If X refuses, Y is declared the winner and if X hikes the bid, it bags the asset. Recently, lenders had used the Swiss Challenge method in the Ruchi Soya case which saw interest from bidders Adani Wimar & Patanjali.
Ashwin Mohan
first published: Apr 5, 2021 09:10 am
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