IBC Amendment Ordinance 2021 Allows “Pre-Pack Insolvency Resolution”

IBC Amendment Ordinance 2021 Allows “Pre-Pack Insolvency Resolution”

The Government of India recently promulgated the IBC Amendment Ordinance 2021, allowing a pre-packaged insolvency process for micro, small and medium enterprises (MSMEs), in consonance with international best practices. The ordinance in essence has amended the Insolvency and Bankruptcy Code 2016 allowing the Central Government to notify such pre-packaged process for defaults of not more than Rs. 1 crore to be initiated by the corporate debtor.

Pre-Pack insolvency resolution

• Pre-packs are essentially a form of restructuring that allow creditors and debtors to work on an informal plan and then submit it for approval. A pre-pack resolution is a form of restructuring that allows creditors and debtors to work on an informal plan and then submit it for approval.
• Under this system, financial creditors will agree to the terms of a potential investor. Further, they will seek approval of the resolution plan from the National Company Law Tribunal (NCLT).
• However, the resolution plan cannot be submitted directly to NCLT. It requires approval of a minimum of 66% of financial creditors that are unrelated to the corporate debtor before submission of a resolution plan.
• NCLTs also require to consider any application for a pre-pack insolvency proceeding before considering a Corporate Insolvency Resolution Process (CIRP). It is the process of resolving corporate insolvency according to the provisions of the Insolvency and Bankruptcy Code, 2016.

Benefits of Pre-Packs over CIRP:

Quicker Resolution: One of the key criticisms of the CIRP is the time taken for resolution. At the end of December 2020, over 86% of the ongoing insolvency resolution proceedings crossed the 270-day threshold. In contrast, the pre-pack resolution process is limited to a maximum of 120 days. Further, only 90 days are available to the stakeholders to bring the resolution plan to the NCLT.

Management Control: Another key difference between pre-packs and CIRP is that the existing management retains control in the case of pre-packs. Whereas a resolution professional takes control of the debtor as a representative of financial creditors in the case of CIRP.