The Insolvency and Bankruptcy Code (Amendment) Bill, 2021, which proposes a pre-packaged insolvency resolution mechanism for micro, small and medium enterprises, was passed in the Lok Sabha on Wednesday.
The bill replaces the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021, which was promulgated on April 4, when Parliament was not in session, and amends the Insolvency and Bankruptcy Code, 2016.
Moneycontrol explains what the pre-packaged insolvency resolution process is, how it will be implemented, how it differs from the corporate insolvency resolution process (CIRP) and what its benefits are.
What is a pre-packaged insolvency resolution mechanism?
A pre-packaged insolvency resolution mechanism is an alternative method of providing a corporate rescue plan for MSMEs.
Under this framework, a debtor initiates and participates in the resolution proceedings with lenders through an informal process. Once the promoters of the company and the secured creditors agree on a resolution plan, they can approach the National Company Law Tribunal for approval.
How is the pre-packaged resolution initiated?
An MSME that has not met its payment obligation of ₹10 lakh can initiate this scheme with approval from lenders that have advanced 66 percent of the debt amount.
What is the corporate insolvency resolution process?
Under the existing CIRP model, an insolvent borrower is taken to bankruptcy court by the creditors for a timebound resolution and the process allows other entities to bid for the stressed entity.
How does the pre-packaged resolution process differ from CIRP?
Under CIRP, the promoter of a stressed unit cannot bid for it. A resolution professional is appointed to oversee the company’s activities and the incumbent promoters have to step down. The resolution professional also manages the bidding and resolution process, for which there is a 270-day deadline.
Under the pre-packaged resolution model, the stressed borrower can prepare a resolution plan with the creditors, which could involve selling the company to an investor, before approaching the NCLT. The borrower retains management control of the company until a resolution is decided.
The time limit for the resolution has been drastically reduced to 120 days – 90 days to submit a resolution plan and 30 days for the NCLT to approve or reject it. Promoters can also bid for their companies in the case of a buyout.
What are the benefits of the pre-packaged model?
For the NCLT, it will be a relief because the tribunal is burdened with several cases that can take several months. The tribunal will only have to reject or approve a resolution plan for MSMEs.
The promoters can continue to be in charge of their company until a settlement is reached and business activities can go on unhindered. The shorter time available for resolution will ensure that a company’s assets are not eroded.
MSMEs have an option to restructure their liabilities and start afresh without going through a lengthy and costly insolvency resolution process.