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Government moves ordinance on pre-packs for distressed MSMEs

As per the ordinance, the minimum default for initiation of corporate insolvency resolution process has been raised to Rs1 crore. (Photo: iStock)Premium
As per the ordinance, the minimum default for initiation of corporate insolvency resolution process has been raised to Rs1 crore. (Photo: iStock)

  • For filing an application for initiating the pre-packaged insolvency resolution process, a corporate debtor should get an approval from its financial creditors representing not less than 66% in value of the financial debt

MUMBAI: The Centre has promulgated an ordinance to bring in pre-packaged insolvency resolution options for micro, small and medium enterprises (MSMEs), hit by the pandemic.

The pre-packs will allow creditors and debtors to work on an informal plan, out of court, before filing for insolvency, which will be then submitted for approval, saving on time. The incumbent management will typically retain control until the final deal is agreed upon.

Signed off by President Ram Nath Kovind and notified by the legislative department on Monday, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021, allows the government to specify a threshold of payment default of not more than Rs1 crore for this special arrangement. Accordingly, defaults above the threshold by small businesses can avail of the scheme.

Applications for initiation of corporate insolvency resolution process will remain suspended in case of defaults arising beginning 25 March, 2020.

"It is considered expedient to provide an efficient alternative insolvency resolution process for corporate persons classified as micro, small and medium enterprises under the Insolvency and Bankruptcy Code, 2016, ensuring quicker, cost-effective and value maximising outcomes for all the stakeholders, in a manner which is least disruptive to the continuity of their businesses and which preserves jobs," the ordinance said.

“In order to achieve these objectives, it is considered expedient to introduce a pre-packaged insolvency resolution process for corporate persons classified as micro, small and medium enterprises," it added.

For filing an application for initiating the pre-packaged insolvency resolution process, a corporate debtor should get an approval from its financial creditors representing not less than 66% in value of the financial debt. The ordinance also says that the process will be completed within 120 days from the pre-packaged insolvency commencement date.

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