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Lok Sabha passes Insolvency and Bankruptcy Code Bill 2021, what are the amendments for small businesses

On April 4 this year, the government amended the insolvency law (Insolvency and Bankruptcy Code 2016)by bringing in an ordinance that provides for a pre-packaged resolution process for micro, small and medium enterprises when Parliament is not in session.

July 28, 2021 / 04:12 PM IST

Lok Sabha, the lower house of the Parliament on July 28 passed the Insolvency and Bankruptcy Code (Amendment) Bill 2021.

Finance minister Nirmala Sitharaman on Monday tabled the Bill in Lok Sabha. However, it could not be passed then because of disruption in the House.

As per these amendments, the government has notified the threshold of a default not exceeding Rs 1 crore for initiation of a pre-packaged resolution process. It remains unchanged.

On April 4 this year, the government amended the insolvency law (Insolvency and Bankruptcy Code 2016)by bringing in an ordinance that provides for a pre-packaged resolution process for micro, small and medium enterprises when Parliament is not in session.

The pre pack is an informal way of providing corporate rescue plan for which seal of approval from a tribunal (National Company Law Tribunal NCLT) will be sought after a resolution plan is arrived at.

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A pre-packed insolvency resolution mechanism is a process wherein a resolution arrangement is agreed upon between the debtor and lender before approaching the NCLT for approval. Under the pre-pack framework, a debtor initiates and participates in the resolution proceedings with the lender through an informal process that would help avoid lengthy and costly court procedures.

Importantly, the borrower can retain management control till a resolution is arrived at.

Under the existing corporate insolvency resolution process (CIRP), as stated in the Insolvency and Bankruptcy Code (IBC), a maximum of 270 days has been provided for the completion of the resolution process. A resolution professional (RP) is appointed to take control of the administration and the incumbent promoters have to step down. The RP manages the bidding and resolution process, which takes several months in most cases.

Under both the pre-pack scheme, the time limit for the resolution will also be drastically reduced. Market participants will get 90 days to submit resolution plans and the National Company Law Tribunal will have another 30 days to approve them.

An MSME which has not met its payment obligation of 10 lakh, could either on its own initiate a pre-pack bankruptcy resolution scheme with approval from lenders or lenders representing 66 percent of the debt of the business could initiate the process.

The ordinance was welcomed by several MSME associations and insolvency experts as the pre pack provides for  a debtor-in-control feature  by ensuring that the business does not suffer any disruption and also reduces the time period of the resolution process drastically.
Shreeja Singh
first published: Jul 28, 2021 04:12 pm
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