Pre-packs for MSMEs: Lok Sabha passes insolvency bill

Our Bureau New Delhi | Updated on July 28, 2021

Bill to replace ordinance issued in April this year

The Lok Sabha on Wednesday passed the Insolvency and Bankruptcy Code (amendment) Bill 2021, giving statutory backing to the pre-packaged insolvency resolution process (pre-pack) regime for companies classified as micro, small and medium enterprises (MSMEs).

This Bill, once passed by Parliament, would replace the ordinance the Centre had promulgated in April this year to introduce pre-packaged insolvency for MSMEs.

Rao Inderjit Singh, Minister of State for Corporate Affairs, moved the Bill for passage in the lower house, saying it would support MSMEs, which were the worst-hit due to the coronavirus-induced lockdown since March last year.

Understanding IBC: Facts and implementation challenges

India currently has 6-7 lakh companies classified as MSMEs and they could potentially benefit from the pre-packaged insolvency framework, which is intended as a cost-effective and speedier alternative to the prevailing corporate insolvency process.

A pre-packaged insolvency — in the Indian framework context— is an arrangement where the resolution of a company’s business is negotiated with a buyer before the appointment of an insolvency professional. It is a blend of informal and formal mechanisms, with the informal part stretching up to NCLT admission, followed by the existing NCLT-supervised process for resolution under IBC.

Pushing ‘pre-packed’ insolvency resolution

The government chose to introduce pre-packs for MSMEs first, as this critical sector contributes significantly to the country’s gross domestic product besides providing sizeable employment. Moreover, since the threshold of debt default is ₹1 crore under IBC, most MSMEs become ineligible for it.

The Centre has notified ₹10 lakh as the debt default threshold for MSMEs in the pre-packaged insolvency resolution process. The ordinance specifies a maximum of 120 days from the commencement date for the completion of the pre-pack process.

Published on July 28, 2021

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