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About 60% of all active cos are eligible for pre-pack turnaround scheme: MCA

The idea behind the pre-pack scheme is to offer an alternative way of turning around small businesses hit by the pandemic.Premium
The idea behind the pre-pack scheme is to offer an alternative way of turning around small businesses hit by the pandemic.

Rajesh Verma, secretary in the ministry of corporate affairs (MCA), said much of the preparatory work needs to be done by the time a pre-pack bankruptcy case is admitted by the tribunal; for this, the company management has to bring a lot to the table.

NEW DELHI : Six out of 10 active Indian companies will be eligible for the new pre-packaged bankruptcy scheme that enables quicker debt resolution, a top government official said. The reason: Out of 1.3 million active companies in the country, about 60% fit in the definition of micro, small and medium enterprises (MSMEs) that are incorporated.

Rajesh Verma, secretary in the ministry of corporate affairs (MCA), said much of the preparatory work needs to be done by the time a pre-pack bankruptcy case is admitted by the tribunal; for this, the company management has to bring a lot to the table.

The finance ministry on Wednesday said in a tweet that the government has decided on a minimum payment default threshold of 10 lakh for initiation of pre-pack insolvency resolution process.

It means an MSME that 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% of the debt of the business could initiate the process. Proprietorships are not covered by the scheme.

The advantage of the pre-pack bankruptcy resolution scheme, introduced on Monday, is that a major part of the work is done informally, including preparation of the turnaround plan for the business.

The idea behind the pre-pack scheme, a new chapter added to India’s four-year old Insolvency and Bankruptcy Code (IBC), is to offer an alternative way of turning around small businesses. Unlike the general provisions for larger companies, this does not displace the existing management. The intention is to ensure that the scheme does not lead to any disruption in the operations of the business given that MSMEs have special characteristics and informal business relationships.

“It is in our interest to keep the business as a going concern and protect it from disruption of any type, which could raise the risk of employment losses. MSMEs are the backbone of the supply chain and the economy," said Verma.

He added that a lot of safeguards have been built into the scheme to prevent any abuse. Even for voluntary initiation of pre-pack bankruptcy, the existing management has to have a special resolution—three-fourth shareholder approval—followed by approval of 66% of creditors.

While the scheme is available to incorporated MSMEs, a large number of small businesses in the country, which are not incorporated, are outside its scope.

Given their large numbers, designing a bankruptcy resolution scheme for them would need huge infrastructure in terms of tribunals and manpower capable of handling these cases.

“It is expected that the incorporation of pre-packaged insolvency resolution process for MSMEs in the IBC will alleviate the distress faced by MSMEs due to the impact of the pandemic and the unique nature of their business, duly recognizing their importance in the economy," said a statement issued by the ministry of corporate affairs.

The finance ministry said in a tweet that the scheme offers quick and cost-effective bankruptcy resolution, which ensures minimum business disruption, value maximization and preservation of employment, while reducing the burden on the National Company Law Tribunal.

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