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MSME pre-pack rules: Scoring system, existing management retains control

The Central government, on Sunday, promulgated an Ordinance with provisions to include pre-packs as a resolution mechanism for MSMEs under the Insolvency and Bankruptcy Code.

By: ENS Economic Bureau | New Delhi |
April 10, 2021 1:09:30 am
Pre-packs allow creditors to resolve the debt of a distressed company through an agreement between secured creditors and investors instead of a public bidding process.

The insolvency regulator on Friday notified rules governing pre-packaged resolutions for micro, small and medium enterprises (MSMEs), including details on the initiation of the pre-pack resolution process, evaluation of resolution plans and termination of the pre-pack process. The Central government, on Sunday, promulgated an Ordinance with provisions to include pre-packs as a resolution mechanism for MSMEs under the Insolvency and Bankruptcy Code.

Pre-packs allow creditors to resolve the debt of a distressed company through an agreement between secured creditors and investors instead of a public bidding process. The inclusion of pre-packs is aimed at helping MSMEs resolve financial distress quickly with minimal impact on operations and employment.

The regulations notified by the Insolvency and Bankruptcy Board of India (IBBI) require the committee of creditors (CoC) to evaluate resolution plans on the basis of a weighted scoring system akin to an evaluation matrix under the Corporate Insolvency Resolution Process (CIRP) under the IBC. This basis of the evaluation of resolution plans will have to be included in the invitation for resolution plans, which has to be posted on the corporate debtor’s website and a website proposed by IBBI for invitations of resolution plans.

Notably, the existing management of the corporate debtor retains control of the management of the company in pre-pack proceedings unlike in the case of a Corporate Insolvency Resolution Process, where management is taken over by an insolvency professional on behalf of creditors.

The regulations also require that the management of the corporate debtor provide a monthly report to the CoC on key developments. The regulations prohibit the management from independently undertaking any transaction of a value above a threshold decided by the CoC.

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