The ordinance aims to make insolvency resolution easier, faster and cost-effective for MSMEs using the ‘pre-pack’ process. It will act as an efficient alternative insolvency resolution process for MSMES under the IBC.
Finance Minister Nirmala Sitharaman. File Photo.
The government has introduced an ordinance for a pre-packaged insolvency resolution process for pandemic-hit micro, small and medium enterprises (MSMEs), which will be completed within 120 days. Moneycontrol has reviewed a copy of the ordinance
The pre-packaged, informal, hybrid and debtor-driven pre-insolvency process, called ‘pre-pack’, will operate under the Insolvency and Bankruptcy Code and is used in overseas jurisdictions like UK, US & Singapore.
“Micro, small and medium enterprises are critical for India’s economy as they contribute significantly to its gross domestic product and provide employment to a sizeable population. It is considered necessary to urgently address the specific requirements of micro, small and medium enterprises relating to the resolution of their insolvency, due to the unique nature of their businesses and simpler corporate structures,” the government ordinance said.
The pre-pack will act as an efficient alternative insolvency resolution process for corporate persons classified as micro, small and medium enterprises under the Insolvency and Bankruptcy Code and 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, the ordinance added.
The Government has taken several measures to mitigate the distress caused by the pandemic, including increasing the minimum amount of default for initiation of corporate insolvency resolution process to Rs 1 crore rupees, and suspending filing of applications for initiation of corporate insolvency resolution process in respect of defaults arising for one year beginning March 25th, 2020. Such suspension for filing of applications for initiation of corporate insolvency resolution process has ended on March 24, 2021.
Following are some of the key features of the new pre-pack framework specified in the Ordinance –
- Approval required by not less than 66 percent of the financial creditors
- Pre-packaged insolvency resolution process to be completed within 120 days
- Mgmt of firm to continue to vest in board of directors, subject to conditions
- Govt may specify default thresholds ( not more than Rs 1 crore) for pre-pac eligibility ( IBC has threshold of Rs 1 crore and above )