Pre-pack scheme: Lok Sabha clears Bill to replace Insolvency and Bankruptcy Code ordinance

The IBC currently stipulates a maximum of 270 days for the completion of the entire CIRP.

The Lok Sabha on Wednesday approved the Insolvency and Bankruptcy Code (amendment) Bill, which will replace an Ordinance that was promulgated in April to introduce a so-called pre-pack resolution scheme for micro, small and medium enterprises (MSMEs).

The scheme allows only the debtor to trigger its own bankruptcy process with the approval of financial creditors having at least 66% of voting power. It will yield resolution faster than the extant corporate insolvency resolution process (CIRP) and cut costs, analysts reckon. If lenders wish to trigger insolvency against MSMEs, they can still do so but under the usual CIRP.

Amid din in the Lok Sabha, the Bill was passed without a proper discussion. Minister of state for finance Bhagwat Kishanrao Karad said the IBC has improved ease of doing business in the country since its inception five years ago. The latest amendments are necessary due to the prevailing situation arising out of the unprecedented pandemic.

The Ordinance was promulgated on April 4, days after the government lifted a one-year suspension of insolvency proceedings against Covid-related defaults.
Given that cash-starved MSMEs have limited wherewithal to go through a long and rigourous insolvency process, the time-limit for resolution has 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.

Under the pre-pack arrangement, honest promoters will be allowed to submit the base plan for resolution, which will then be put to competitive bidding through 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.

Also, 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.

Since MSMEs typically account for the largest chunk of insolvency cases, the pre-pack scheme will help them resolve stress better and faster, analysts say.
As part of its measures to soften the Covid-19 blow, the government had last year proposed to bring in a special framework for these small businesses. The scheme is based on the report of a panel headed by Insolvency and Bankruptcy Board of India (IBBI) chairman MS Sahoo.