Goaltide Daily News 2021
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What is prepackaged insolvency resolution & how does process work?
The government on July 26 tabled the Insolvency and Bankruptcy Code (Amendment) Bill in the Lok Sabha introducing a new chapter on the prepackaged insolvency process that provides a resolution mechanism for stressed micro, small and medium enterprises (MSMEs). The IBC (Amendment) Bill change is in keeping with the ordinance promulgated on April 4, 2021. Here’s what this process entails and the need for it.
What is the prepackaged insolvency resolution?
Prepackaged resolution is a fast track process that identifies a resolution plan before the process is admitted by the National Company Law Tribunal. It is an arrangement where the promoter of the stressed company proposes a resolution plan to the creditors before the company can be taken to bankruptcy proceedings. The purpose of this scheme is not just to have a timely and faster resolution mechanism but also to give legal sanction to a plan agreed among banks, promoters and the buyer.
The journey of a prepack starts with an informal understanding, engages the stakeholders in between, and ends with a judicial blessing of the outcome by the NCLT.
The prepackage process for resolution has been popular in Europe and the US over the past decade.
How does the process work?
The scheme is currently available only for MSMEs and follows a debtor-in-possession model. The promoter of the MSME can propose a base resolution plan to the committee of creditors (CoC). If the plan is not acceptable, then the resolution professional would invite other applicants to propose a plan within 90 days. The CoC can go for the alternative resolution plan if it is significantly better than the base resolution plan proposed by the promoter. It can also ask the promoter to revise its plan.
What are the checks and balances to ensure effective resolution and no misuse of the process by the promoter?
Even though it is a debtor-in-possession model, the CoC can, with a 66 per cent vote share, make an application for change in the management of the company and pass control to the resolution professional. This can be done if CoC finds that the company is being run in a fraudulent manner or there has been gross mismanagement of company affairs by the promoter.
If the resolution plan submitted by the promoter provides for impairment (drastic reduction in recoverable amount) of any claims, the CoC can ask the promoters to dilute their shareholding or voting or control rights in the company.
How is it different from the corporate insolvency process?
Unlike the Corporate Insolvency Resolution Process (CIRP), where the company is managed by the resolution profession, a prepack process does not result in the change of the company’s management while the process is on. The management would continue to vest in the board of directors or the partners.
The deadlines have been moved up for the prepackaged scheme compared to CIRP. For instance, the corporate debtor has to submit the resolution plan within two days of the commencement of the prepackaged insolvency. The entire process has to be completed within 120 days of the commencement date.
When can a company not go for a prepack option?
To be eligible for prepack, a company must not be undergoing a corporate insolvency resolution process. A prepack cannot be initiated within three years of closure of another prepack — just like a CIRP cannot be initiated within 12 months of closure of another CIRP.
What are the benefits of the prepackaged scheme?
Being a debtor-initiated process, it is expected to involve less legal disputes and faster resolution than a CIRP. The government has said that this alternative framework under the Code is meant to be a quicker, cost-effective insolvency resolution process that is least disruptive to the businesses, ensuring job preservation, among other objectives.
The scheme was brought to especially address the challenges of the MSME sector, which contributes significantly to the GDP and employment generation in the country. This framework came right after the suspension on insolvency initiation had come to an end and the minimum level of default under CIRP had been increased to Rs 1 crore.
Legal experts have said that where a corporate insolvency resolution process cannot be initiated against a Covid-related default, which is defined as default that occurred between March 24, 2020 and March 24, 2021, prepackaged scheme is a viable alternative. “Lenders are awaiting similar provisions for large corporate entities. Prepackaged insolvency can help in resolving stress early and cut resolution time for corporations staring at default,” Rajiv Chandak, partner, Deloitte India, said.
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