Insolvency: Bill on pre-pack resolution of MSMEs tabled

Finance and Corporate Affairs Minister Nirmala Sitharaman introduced the Insolvency and Bankruptcy Code (Amendment Bill), 2021 in the Lok Sabha on Monday. The Bill is set to replace the IBC Amendment Ordinance 2021 promulgated in April which introduced pre-packs as an insolvency resolution mechanism for micro, small and medium enterprises (MSMEs) with defaults up to Rs 1 crore.

Distressed corporate debtors (CDs) are permitted to initiate a pre-packaged insolvency resolution process (PIRP) with the approval of two-thirds of their creditors to resolve their outstanding debt under the new mechanism. CDs are also required to submit a base resolution plan at the time of the initiation of the PIRP. Unlike in the case of corporate insolvency resolution process (CIRP), debtors remain in control of their distressed firm during the PIRP.

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The PIRP also allows for a Swiss challenge to the resolution plan submitted by a CD in case operational creditors are not paid 100 per cent of their outstanding dues. Under the Swiss challenge mechanism, any third party would be permitted to submit a resolution plan for the distressed company and the original applicant would have to either match the improved resolution plan or forego the investment.

Besides offering a way for MSMEs to restructure their debts, the pre-pack scheme could also reduce the burden on benches of the National Company Law Tribunals by offering a faster resolution mechanism than ordinary CIRPs.