Almost 60% of the over 13 lakh active companies in the country will be eligible for the pre-pack bankruptcy resolution scheme. That is because a large part of the functional companies fit the definition of MSMEs which are incorporated
NEW DELHI: A Bill to amend the Insolvency and Bankruptcy Code (IBC) was tabled in Lok Sabha on Monday and finance and corporate affairs minister Nirmala Sitharaman is scheduled to move it for the House’s consideration. Mint takes a look at what the IBC (Amendment) Bill, 2021 seeks to achieve.
There has been a demand for offering a simplified version of IBC that saves time and cost of bankruptcy proceedings for small businesses in distress. Accordingly, an Ordinance was promulgated in April this year that offered what is called a ‘pre-packaged’ or pre-pack resolution scheme. It is an informal way of stitching together a corporate rescue plan for which seal of approval from a tribunal will be sought subsequently. The IBC (Amendment) Bill, 2021 seeks to replace this Ordinance.
What is the most important feature of the pre-pack scheme?
Unlike general bankruptcy provisions, proprietors or major shareholders of a small business do not lose operational control of the enterprise to lenders once a pre-pack insolvency scheme commences. This is very important for small businesses because the best person to run the firm would be its promoters who get orders on the basis of personal relationships and are experts in that business. Also, getting outsiders to run small businesses may be a difficult task to achieve. The ‘debtor-in-control’ feature ensures that the business does not suffer any disruption. The Ordinance said that the government felt it was expedient to provide an “efficient alternative insolvency resolution process for corporate persons classified as MSMEs" under the IBC. The idea was to “ensure 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.
Who all are eligible for the scheme?
Almost 60% of the over 13 lakh active companies in the country will be eligible for the pre-pack bankruptcy resolution scheme. That is because a large part of the functional companies fit the definition of micro, small and medium enterprises (MSMEs) which are incorporated. Proprietorships are not covered by the scheme.
An MSME which 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. Under the scheme, lenders have extensive oversight but the business in distress enjoys moratorium from all recovery proceedings and remains in control of the operations so that there is no disruption to business and employment. It is informal up to a point and formal thereafter. The rescue plan of the company submitted by the existing promoters is exposed to Swiss challenge for value maximisation. However, for any revival plan from a new investor to get approved, it needs to be ‘significantly better.’ In other circumstances when the new bid is not significantly better than the one given by the promoters of the company, creditors could invite the new bidder and the promoter to improve upon their offers till either of them fails to raise the bid within the given time.
Will similar scheme be offered to larger companies?
There is a demand from the industry to extend pre-pack scheme to large businesses too. Pre-packs have added a new dimension to bankruptcy proceedings and it is likely that the government will be cautious before widening its scope.
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