Pre-pack scheme: FM introduces Bill in LS to replace ordinance

Importantly, promoters will continue to run the MSMEs, unlike in the CIRP, where the resolution professional gets to run the affairs with guidance from financial creditors.

Finance Minister Nirmala Sitharaman on Monday introduced a Bill to replace an ordinance on the Insolvency and Bankruptcy Code (IBC), which provides for the so-called pre-pack resolution scheme for micro, small and medium enterprises (MSMEs).

Under the scheme, only the debtor gets to trigger its own bankruptcy process. It is designed to yield a faster resolution, cost less and reduce litigation often triggered by defaulting promoters to retain control of their firms, analysts have said.

The ordinance was promulgated on April 4, days after the lifting of the one-year suspension of insolvency proceedings against Covid-related defaults. The IBC (Amendment) Bill, 2021, is modelled after the report of a panel headed by Insolvency and Bankruptcy Board of India (IBBI) chairman MS Sahoo.

To file for pre-pack insolvency, the MSME debtor will require the approval of unrelated financial creditors accounting for at least 66% of dues. Honest promoters will be allowed to submit the base plan for resolution, which will then be put to competitive bidding through a Swiss challenge.

However, in cases where operational creditors are not required to take a haircut, the promoter’s plan, backed by financial creditors with at least 66% of voting power, can be presented before the National Company Law Tribunal (NCLT) for clearance.

Importantly, promoters will continue to run the MSMEs, unlike in the CIRP, where the resolution professional gets to run the affairs with guidance from financial creditors.

The time limit for resolution has also been drastically reduced. Pre-pack resolution plans have to be submitted in only 90 days and the NCLT will have another 30 days to approve them. The IBC currently stipulates a maximum of 270 days for the completion of the entire CIRP.

The disposal of a pre-pack application has been given priority over the CIRP application for the same stressed MSME under Sections 7, 9 and 10 of the IBC, subject to certain conditions. However, in case of already pending CIRP applications, NCLT will need to dispose of them before considering the pre-pack application for relevant debtors, analysts have said.

According to IBBI data, 1,723 cases were in the resolution process as of March 2021. Since MSMEs typically account for the largest chunk of these cases, the pre-pack scheme will help them resolve stress better and faster, according to analysts.

Rajiv Chandak, partner at Deloitte India, said lenders are now awaiting similar provisions for larger corporations. “Pre-packaged insolvency can help in resolving stress early and cut resolution time for companies staring at default.”

Anoop Rawat, partner (insolvency & bankruptcy) at Shardul Amarchand Mangaldas, said pre-pack insolvency is a fast-track process that envisages identification of a resolution plan prior to the admission of the process by the NCLT.