{"id":33581,"date":"2021-07-27T13:59:37","date_gmt":"2021-07-27T08:29:37","guid":{"rendered":"https:\/\/corpbiz.io\/learning\/?p=33581"},"modified":"2024-07-03T15:50:01","modified_gmt":"2024-07-03T10:20:01","slug":"pre-pack-insolvency-resolution-process-for-msme","status":"publish","type":"post","link":"https:\/\/corpbiz.io\/learning\/pre-pack-insolvency-resolution-process-for-msme\/","title":{"rendered":"Know About Pre-Pack Insolvency Resolution Process for MSME"},"content":{"rendered":"\n

The introduction of the Insolvency and Bankruptcy Code, 2016 (aka “IBC) has led to a groundbreaking change in India’s corporate distress resolution framework. Sign of relief to the company whose future previously depended on the array of debt restructuring schemes launched in the past, the failures of which often lead to insolvency or left the companies with unproductive assets whose value degrades with time. The rigidity in the previous debt restructuring schemes has led to the birth of Pre-pack insolvency resolution process for MSME<\/strong><\/a>. <\/p>\n\n\n\n

In\nthe Indian business landscape, most entities are driven by promoters.\nPresently, IBC bars the company management, accountable for leading the company\ntoward insolvency, to recoup control over the business. This leads to the\ncreation of an imbalance situation that can be effectively counter via Pre-Pack\nschemes.<\/p>\n\n\n\n

Pre-pack\nrefers to a scheme where the debtor talks with the creditor to stay in business\nand keep its business activities running. For a scenario where a company is\ninching towards insolvency owing to macroeconomic disturbances, then it would\nbe a viable alternative to permit the promoter to revive its company since he\nis familiar with the dynamics and operational hindrances. <\/p>\n\n\n\n

The\npre-Pack scheme being the newest step in the development of the IBC, envisages\nat coordinating various corporate restructuring tools such as asset selling of\nthe debtor to another company, interim financing, refinancing, change in\nmanagement etc., before the debtor inches towards insolvency proceedings under\nIBC.<\/p>\n\n\n\n

The\ninterim report prepared by the Bankruptcy Law Reform Committee, Feb 2015,\ntalked about the feasibility of the scheme above and suggested that such\nschemes are less effective for insolvency resolution as the Indian market lacks\nthe infrastructure to permit ‘out of court’ restructuring without court’s\nintervention. But, after that, the GOI and the concerned regulator (IBBI)\nexamined the scheme, more so in view of the Covid-19 outbreak, which was\nmentioned in the report but the Sub-Committee of ILC on Pre-Packaged Insolvency\nResolution Process on October 10, 2020. <\/p>\n\n\n\n

In the recent past, soon after the end of the 1-year suspension of the insolvency levied by the GOI in the wake of Covid-19 Pandemic on April 4, 2021, the Central ministry rolled out an ordinance to implement pre-packed insolvency for entities classified as MSME with default up to Rs 1 crore under the IBC. <\/p>\n\n\n\n

The said Ordinance stressed the urgency and necessity of such an action due to countless economic obstacles encountered amidst the pandemic.<\/p>\n\n\n\n

Read our article<\/b>:How to Register under Micro Small and Medium Enterprises in India? <\/a><\/mark><\/p>\n\n\n\n

Analysis of\nthe Background<\/h2>\n\n\n\n

In\nview of ever-increasing corporate and individual insolvencies amid the Covid-19\noutbreak, the economies find it hard to keep themselves afloat. The IMF and\nWorld Bank have opined plenty of measures and the deployment of the same via a\n3-phased approach which may aid the economy transition seamlessly towards the\nproductive side of the graph. <\/p>\n\n\n\n

In\nthe first phase, various temporary steps need to be taken to deter insolvency\n& debt enforcement undertakings. In the second phase, when a massive wave\nof insolvencies is projected to come in effect, it may be addressed by\nconventional measures, such as out-of-court workouts to ‘flatten the curve’ of\ninsolvencies. <\/p>\n\n\n\n

The\nthird phase is for the conventional debt resolution tools for addressing the\nleft out overhang & ensures economic growth in the medium term. <\/p>\n\n\n\n

In response, GOI has launched\nspecific measures such as<\/em><\/strong>;<\/em><\/p>\n\n\n

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\"GOI<\/figure><\/div>\n\n\n

The\nGOI has augmented the limit of default for filing an insolvency application\nfrom Rs 1,00,000 to Rs 1 crores to safeguard the MSMEs’ interest from\nencountering insolvency proceedings.<\/p>\n\n\n\n

Key points of\nthe Ordinance <\/h2>\n\n\n\n