Pre-packaged insolvency process under Indian bankruptcy code is positive but limited in its scope, feel experts

by Jeremy

Ease of Doing Business for MSMEs: The Central government has introduced an ordinance for a prepackaged insolvency resolution process for micro, small and medium enterprises (MSME) under the Insolvency and Bankruptcy Code, 2016 (IBC). The MSME sector got severely hit due to the Covid-19 pandemic putting them in a stressed situation.

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Read More: Insolvency scheme: Govt, regulator finalizing pre-pack framework, MSME scheme.

The rationale for promulgating the IBC amendment ordinance has been to offer an alternative resolution mechanism to MSMEs that is “quicker, cost-effective and value maximizing outcomes for all the stakeholders, in a manner which is least disruptive to the continuity of their businesses and which preserves jobs.” The prepackaged insolvency process allows the promoters and the firm’s management to create an informal plan for debt resolution with its creditors.

In that sense, it is a positive step that offers the firm’s promoters an alternative to the usual drawn-out (at least six months) and expensive Corporate Insolvency Resolution Process (CIRP) where the productive assets are liquidated to pay the creditors. The Ordinance is a step in the right direction and should help restructure the stressed assets of MSMEs quickly,” said Ashok Saigal, Co-chairman, CII National MSME Council, and Managing Director, Frontier Technologies. He added that this mechanism allows the firm’s management to be a part of the restructuring exercise, giving them another chance to course-correct and continue running the business.

With the Ordinance, when MSMEs default, they now have a mechanism to propose their base resolution plan and initiate a prepackaged insolvency resolution process themselves with the consent of 66 percent of their unrelated financial creditors. Once the process starts, the National Company Law Tribunal (NCLT) will appoint a resolution professional. Unlike the CIRP process where the resolution professional takes charge of the company, in this case, they will act as a facilitator and help improve the base plan or invite a competitive.

Plan from potential resolution applicants, if required. “Given that the company itself initiates its resolution with a base plan with the approval of 66 percent of financial creditors consent to initiate the process, makes it a faster and more efficient,” said Misha, Partner at law firm Shardul Amarchand Mangaldas. If the company’s affairs are carried out fraudulently or grossly mismanaged, the committee of creditors, through the resolution professional, apply to the NCLT to shift the control and management of the company to the answer professional.

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