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Tags Current Affairs

Resolution pre-packs for MSMEs

Date: 30 July 2021 Tags: Bills & Laws

Issue

The insolvency resolution mechanism for Micro, Small and Medium Enterprises (MSMEs) has proposed pre-packs under the new Insolvency and Bankruptcy Code (Amendment) Bill, 2021.

 

Background

The bill will replace the ordinance that already existed i.e. the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021.

 

Details

  • In pre-packs, instead of a public bidding process, debt of a distressed company will be resolved through an agreement between secured creditors, owners and outside creditors.

  • The form of insolvency method is popular outside India in countries such as United Kingdom and other European countries.

  • Financial creditors and promoters will have to approach National Company Law Tribunal (NCLT) with a new resolution plan under the pre-pack.

  • Before getting the approval for the plan from NCLAT, the approval of atleast 66 percent of the financial debtors not related to the debtor has to be obtained.

  • The rejection or approval of the plan by NCLAT is necessary if application for a pre-pack insolvency proceeding is to be considered.

 

Importance of pre-pack

  • The existing Corporate Insolvency Resolution Process (CIRP) is time consuming. This is because of large petitions filed by the erstwhile promoters and bidders.

  • In pre-pack, promoters and creditors will have a time limit of maximum of 120 days before they can bring a plan to NCLAT for resolution.

  • In pre-pack, the existing management takes control of the entity. In CIRP, a new resolution professional takes charge. This would have caused disruptions.

 

Reasons for introduction of pre-pack

  • It will help MSMEs to restructure their liabilities and start from a fresh point. It also ensures that system is not misused by entities to deny payment to creditors.

  • Pre-pack employs ‘Swiss challenge’ method to give opportunity to plans that can generate full recovery of dues.

 

Challenges for pre-packs

The management has to bring back the company from clutches of debts. The public stakeholders of company must not suffer due to non-payment of dues.

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