Easing the pain

Pre-pack scheme for MSMEs will bring down costs, lead to faster resolution of cases.

The central government has passed an ordinance to amend the Insolvency and Bankruptcy Code (IBC). In line with recommendations of the sub-committee of the Insolvency Law Committee (ILC), it provides for a pre-pack resolution scheme for micro, small and medium enterprises. Under the new arrangement, the debtors will be allowed to propose a resolution plan before the firm enters bankruptcy proceedings, while retaining control of the company. The rationale for such an arrangement is straightforward. First, this option will help ease the resolution process of MSMEs, as, considering that there aren’t enough buyers for stressed assets in the economy in the first place, not allowing existing promoters the option of participating in the resolution process would lead to capital destruction. Second, the scheme will not only bring down the costs associated with the resolution process, but may also lead to faster resolution of cases, as the frivolous litigation brought by defaulting promoters, in hopes of clinging on to their firms, will be reduced.

Broadly, the pre-pack scheme is an arrangement wherein the corporate debtor proposes a resolution plan to the secured creditors before the initiation of corporate insolvency resolution procedure (CIRP). During this process, the company will continue to be controlled by the existing management rather than coming under the control of the resolution professional — considered to be a less disruptive process. The resolution plan can then be taken for approval by the secured creditors to the National Company Law Tribunal (NCLT), provided it is approved by 66 per cent of them. The scheme also takes into consideration the issue of operational creditors. Any proposed resolution plan that does not offer full recovery of claims of operational creditors will face a challenge — the resolution professional can allow others to submit resolution plans to compete with the corporate debtors. The committee of creditors has the option of choosing an alternative resolution plan if it is better than the “base” plan offered by the corporate debtor.

In line with the time-bound resolution process envisaged under the IBC, the pre-pack scheme also prescribes timelines. It allows for 120 days for the entire process — 90 days for the submission of the resolution plans, and 30 days for the NCLT to improve them. Considering that data from the Insolvency and Bankruptcy Board of India (IBBI) shows that of the 1,717 cases currently undergoing the resolution process, 1,481 (86.3 per cent) have been going on for more than 270 days (in comparison, the IBC had initially envisaged that the resolution process must be completed within 270 days from the date of the insolvency proceedings commencing, which was later extended to 330 days), this pre-pack arrangement, by reducing the number of cases clogging the system, could unburden the tribunals, leading to a swifter disposal of the other cases.

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