{"id":14702,"date":"2021-04-07T00:00:00","date_gmt":"2021-04-07T00:00:00","guid":{"rendered":"https:\/\/www.nextias.com\/current_affairs\/uncategorized\/07-04-2021\/pre-packs-insolvency-resolution-option-for-msmes\/"},"modified":"2021-04-07T00:00:00","modified_gmt":"2021-04-07T00:00:00","slug":"pre-packs-insolvency-resolution-option-for-msmes","status":"publish","type":"post","link":"https:\/\/www.nextias.com\/ca\/current-affairs\/07-04-2021\/pre-packs-insolvency-resolution-option-for-msmes","title":{"rendered":"Pre-Packs Insolvency Resolution Option for MSMEs"},"content":{"rendered":"<p><strong>In News<\/strong><\/p>\n<p>The central government promulgated an ordinance allowing the use of <strong>pre-packs <\/strong>as an <strong>insolvency resolution mechanism for Micro, Small and Medium Enterprises (MSMEs) <\/strong>with defaults up to <strong>Rs 1 crore<\/strong>, under <strong>the Insolvency and Bankruptcy Code<\/strong>.<\/p>\n<p><strong>About<\/strong><\/p>\n<ul>\n<li>The move comes soon after the end of a one-year suspension of insolvency initiation imposed by the government in light of the Covid-19 pandemic.<\/li>\n<li>The government had last year also increased the minimum default threshold for insolvency proceedings from Rs 1 lakh to Rs 1 crore.\u00a0<\/li>\n<\/ul>\n<p><strong>Objectives\u00a0 behind the introduction of the Pre-Pack<\/strong><\/p>\n<ul>\n<li>Pre-Packs are largely aimed at providing MSMEs with an <strong>opportunity to restructure<\/strong> <strong>their liabilities and start <\/strong>with a <strong>clean slate<\/strong> while still providing <strong>adequate protections<\/strong> so that the system is not <strong>misused by firms<\/strong> to <strong>avoid making payments <\/strong>to creditors.<\/li>\n<li>It will help <strong>corporate debtors<\/strong> to enter into <strong>consensual restructuring<\/strong> with lenders and address the entire liability side of the company.\n<ul>\n<li>The government should consider setting up <strong>specific benches of the NCLT<\/strong> to deal with pre-pack resolution plans to ensure that they are implemented in a time-bound manner.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><strong>What are Pre-Packs?<\/strong><\/p>\n<ul>\n<li>A pre-pack is the <strong>resolution of the debt<\/strong> of a <strong>distressed company<\/strong> through an <strong>agreement between secured creditors <\/strong>and <strong>investors <\/strong>instead of a <strong>public bidding process. <\/strong><\/li>\n<li>This system of insolvency proceedings has become an increasingly <strong>popular mechanism <\/strong>for insolvency resolution in the <strong>UK and Europe <\/strong>over the past decade.<\/li>\n<li>Under the pre-pack system,<strong> financial creditors<\/strong> will agree to terms with a<strong> potential<\/strong> <strong>investor and seek approval <\/strong>of the <strong>resolution plan<\/strong> from the <strong>National Company Law Tribunal (NCLT).<\/strong><\/li>\n<li>The approval of a minimum of<strong> 66 percent of financial creditors <\/strong>that are unrelated to the <strong>corporate debtor<\/strong> would be required before a resolution plan is submitted to the <strong>NCLT. <\/strong>\u00a0\n<ul>\n<li>Further NCLTs are also required to either accept or reject any application for a <strong>pre-pack insolvency proceeding<\/strong> before considering a petition for a CIRP.<\/li>\n<\/ul>\n<\/li>\n<li>The pre-pack is expected to be rolled out to all corporations over time as legal issues around the provisions are settled through case law.<\/li>\n<\/ul>\n<p><strong>Benefits of Pre-Packs over the Corporate Insolvency Resolution Process (CIRP)<\/strong><\/p>\n<ul>\n<li>One of the key criticisms of the CIRP has been the <strong>time taken for resolution.<\/strong>\n<ul>\n<li>\u00a0At the end of December 2020, <strong>over 86 per cent of the 1717<\/strong> ongoing insolvency resolution proceedings had crossed the <strong>270-day threshold.<\/strong>\n<ul>\n<li>\u00a0The key reasons behind delays in the<strong> CIRPs are prolonged litigations<\/strong> by erstwhile <strong>promoters and potential bidders<\/strong>.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<li>The pre-pack in contrast is limited to a <strong>maximum of 120 days with only 90 days<\/strong> available to the <strong>stakeholders<\/strong> to bring the <strong>resolution plan to the NCLT.<\/strong><\/li>\n<li>Another key difference between pre-packs and CIRP is that the <strong>existing management<\/strong> <strong>retains control<\/strong> in the <strong>case of pre-packs<\/strong> while a <strong>resolution professional takes<\/strong> <strong>control <\/strong>of the <strong>debtor as a representative of financial creditors<\/strong> in the case of CIRP.\n<ul>\n<li>Experts note that this allows for minimal disruption of operations relative to a CIRP.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><strong>More benefits <\/strong><\/p>\n<ul>\n<li><strong>Protection to Creditors: <\/strong>The pre-pack provisions introduced by the central government also provided for adequate protection to ensure the provisions were not misused by<strong> <\/strong>errant promoters<strong>.<\/strong>\n<ul>\n<li>\u00a0The pre-pack mechanism allows for a <strong>swiss challenge <\/strong>for any resolution plans which proved less than <strong>full recovery of dues for operational creditors<\/strong>.\n<ul>\n<li>Under the <strong>swiss challenge mechanism<\/strong>, any third party would be permitted to submit a resolution plan for the <strong>distressed company <\/strong>and the original applicant would have to either match the improved resolution plan or forego the investment.<\/li>\n<li>Creditors are also permitted to seek resolution plans from any third party if they are not satisfied with the resolution plan put forth by the promoter.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<table border=\"1\" cellspacing=\"0\" style=\"width:624px\">\n<tbody>\n<tr>\n<td style=\"background-color:#fff2cc; width:6.5in\">\n<p><strong>About Insolvency and Bankruptcy Code, 2016 (IBC)<\/strong><\/p>\n<ul>\n<li>It was implemented through an act of<strong> Parliament.<\/strong><\/li>\n<li>It is the <strong>bankruptcy law of India<\/strong> which seeks to consolidate the existing framework by creating a <strong>single law for insolvency and bankruptcy.<\/strong><\/li>\n<li>The code will be able to protect the <strong>interests of small investors<\/strong> and make the process of doing the business <strong>less cumbersome process<\/strong><\/li>\n<li>The law was necessitated due to a<strong> huge pile-up of non-performing loans<\/strong> of banks and a delay in debt resolution.<\/li>\n<li>Companies have to complete the <strong>entire insolvency exercise within 180 days<\/strong> under IBC and the <strong>deadline may be extended<\/strong> if the creditors<strong> do not raise objections<\/strong> to the <strong>extension<\/strong>.<\/li>\n<li><strong>Insolvency and Bankruptcy Board <\/strong>of India has been appointed as a regulator and it can oversee these proceedings.\n<ul>\n<li>\u00a0IBBI has 10 members( from the Ministry of\u00a0 Finance,\u00a0 Ministry of Law &#038; Justice and the Reserve Bank of India).<\/li>\n<\/ul>\n<\/li>\n<li><strong>Aims and objectives-<\/strong>\n<ul>\n<li>IBC applies to <strong>companies<\/strong>,<strong> partnerships and individuals <\/strong>and It provides a time-bound process to resolve insolvency.\n<ul>\n<li>When a <strong>default <\/strong>in<strong> repayment occurs<\/strong>, <strong>creditors gain control<\/strong> over the <strong>debtor\u2019s assets<\/strong> and must make decisions to resolve insolvency.<\/li>\n<li>\u00a0Under IBC debtor and creditor both can start \u2018recovery\u2019 proceedings against each other.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><strong>Corporate Insolvency Resolution Process (CIRP)<\/strong><\/p>\n<ul>\n<li>The CIRP may include necessary steps to <strong>revive the company<\/strong> such as<strong> raising fresh<\/strong> <strong>funds for operation, looking for a new buye<\/strong>r to sell the company as going concern.<\/li>\n<li>The <strong>outstanding debts<\/strong> may be satisfied by way of another person submitting a <strong>Resolution plan<\/strong> to take over the <strong>Company and pay off the remaining debts.<\/strong><\/li>\n<li>In the event a resolution plan is not submitted or not approved by the committee of creditors (COC), the CIRP process is deemed to have failed.\n<ul>\n<li>In such a situation the<strong> liquidation proceeds.<\/strong><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n","protected":false},"excerpt":{"rendered":"<p>In News The central government promulgated an ordinance allowing the use of pre-packs as an insolvency resolution mechanism for Micro, Small and Medium Enterprises (MSMEs) with defaults up to Rs 1 crore, under the Insolvency and Bankruptcy Code. About The move comes soon after the end of a one-year suspension of insolvency initiation imposed by [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":14703,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[21],"tags":[26,46],"class_list":["post-14702","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-current-affairs","tag-gs-3","tag-indian-economy-related-issues"],"acf":[],"jetpack_featured_media_url":"https:\/\/wp-images.nextias.com\/cdn-cgi\/image\/format=auto\/ca\/uploads\/2023\/07\/4996873current-affairs.jpg","_links":{"self":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/14702","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/comments?post=14702"}],"version-history":[{"count":0,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/14702\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/media\/14703"}],"wp:attachment":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/media?parent=14702"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/categories?post=14702"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/tags?post=14702"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}