IBC amendment seeks to provide prepack resolutions for MSMEs

NEW DELHI: The government has amended the Insolvency & Bankruptcy Code to provide for prepackaged resolution framework for micro, small and medium enterprises (MSMEs) through promulgation of an ordinance.

The alternative insolvency resolution framework is expected to bring about a quicker and more cost-effective process for MSMEs that would maximise value while being least disruptive to business, according to the ordinance, issued late Sunday.

Prepackaged insolvency resolution is seen advantageous as a resolution plan can be settled upon outside of court, leading to fewer business disruption costs, lower legal and procedural costs and less time in court.

As per the provisions of the ordinance, the prepack process will be eligible for defaults of Rs 1 lakh and above, with clauses that allow for the threshold default amount of up to Rs 1 crore.

Experts say the decision is timely considering the need for alternative resolution processes in light of the expiration of the ban on initiating corporate insolvency proceedings as company law tribunals are expected to be flooded with cases.

Suspension on fresh insolvency proceedings, provided to give relief due to the Covid-19 pandemic, ended on March 25 after a year. “It’s a cautious step to begin prepacks with MSMEs, they will probably roll it out for larger corporates later, but it’s a good start,” said Dinkar Venkatasubramanian, restructuring partner at EY. “It will address a lot of the Covid-19-related stress of MSMEs, clean up bank balance sheets and release pressure from the IBC infrastructure.”

The new framework applies to defaults occurring during the pandemic period and is based on the ‘debtor-in-possession’ model with the involvement of a resolution professional only to monitor the process to ensure transparency.

MSME graph

A corporate debtor (CD) can initiate the process with the approval of 60% of financial creditors and the entire court proceedings from commencement to the approval of the resolution plan will have to be completed in 120 days, as per the ordinance.

The base resolution plan, which would be the result of out-of-court negotiations, would have to be submitted before the Committee of Creditors (CoC) within two days of the commencement of the process.

Ordinance to Dissolve Several Appellate Bodies

The government has promulgated an ordinance paving the way for dissolution of several appellate

bodies and transferring their functions to judicial bodies. The ordinance was issued after a bill in this regard that was introduced in the Lok Sabha on February 13 could not be passed. The Tribunal Reforms (Rationalisation and Conditions of Service) Bill, 2021, could not be taken up for consideration and passing in the House of the People and the President is satisfied that circumstances exist which render it necessary for him to take immediate action,

according to the ordinance issued on Monday. The ordinance laid down that the Central government will appoint the chairperson and members of a tribunal based on recommendations of a search-cum-selection committee.

(The one-stop destination for MSME, ET RISE provides news, views and analysis around GST, Exports, Funding, Policy and small business management.)

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