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Business News/ News / India/  Managers of defaulting small entities to work under watch
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Managers of defaulting small entities to work under watch

Rescue professionals hired by lenders under the pre-pack resolution scheme will be on vigil
  • Pre packs are the schemes drawn up by lenders and other stakeholders outside the court to save time
  • The idea is to make sure that every material decision of the management, which failed to maintain the business as a viable entity, is reviewed by the professional hired by the lenders.Premium
    The idea is to make sure that every material decision of the management, which failed to maintain the business as a viable entity, is reviewed by the professional hired by the lenders.

    Directors and partners of defaulting small businesses will be under the close watch of the corporate rescue professionals hired by lenders under the new pre-pack bankruptcy resolution scheme rolled out on Monday, though the existing management will continue to run the business.

    Pre-packs are schemes drawn up by lenders and other stakeholders outside the court to save time and will later be placed before it for its sanction.

    According to the scheme, the insolvency professional hired by lenders will at first report whether the defaulting business is eligible for the pre-pack scheme and whether the rescue plan proposed by it is in order. Once the resolution process starts, the insolvency professional will keep a close watch over how the company is run by the management.

    Allowing a management that defaulted on payments to keep running the company, the most salient feature of the new pre-pack resolution scheme, comes with close oversight of the management’s subsequent conduct.

    The idea is to make sure that every material decision of the management, which failed to maintain the business as a viable entity, is reviewed by the professional hired by the lenders.

    According to The Insolvency and Bankruptcy Code (Amendment) Ordinance 2021, that was promulgated on Monday, the insolvency professional will report to the lenders every breach of obligation by the directors or partners of the business.

    They will collect details of transactions for two years preceding the beginning of the bankruptcy resolution process and access information about the business from all financial institutions that maintain its records.

    The directors and partners of the bankrupt entity are also required to cooperate with the insolvency professional “as may be required by him to perform his duties and exercise his powers", the ordinance added.

    Also, at any point in time, the resolution professional can move the bankruptcy tribunal to take over management control of the business if creditors representing 66% of the business’s debt feel so for reasons such as fraud or gross mismanagement by the management.

    With the close oversight of the management of a defaulting business, the government seeks to make sure that the liberty for an informal drawing up of a rescue plan is not abused.

    It also marks a very cautious approach by the ministry of corporate affairs in adding a new dimension to the Insolvency and Bankruptcy Code of 2016 before it is opened up for larger businesses. At present, the pre-pack scheme is available for businesses that default on payment obligations above 1 lakh but below a specific threshold to be separately announced by the government.

    “Shareholders remain in total control of the business so long as all payment obligations are met. The basic principle of bankruptcy resolution is that once there is a default on a payment obligation, lenders get the upper hand," explained a government official, who spoke on condition of anonymity.

    The pre-pack scheme can be initiated either voluntarily by businesses with the board adopting a special resolution or by a resolution by three-fourth of the total number of partners or by creditors representing 66% of the debt of the business.

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    ABOUT THE AUTHOR
    Gireesh Chandra Prasad
    Gireesh has over 22 years of experience in business journalism covering diverse aspects of the economy, including finance, taxation, energy, aviation, corporate and bankruptcy laws, accounting and auditing.
    Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
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    Published: 06 Apr 2021, 12:34 PM IST
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