0

0

0

0

0

0

0

0

0

This article is more than 9 month old.

Pre-packs in insolvency in India: An expressway to debt resolution

Mini

The newly introduced pre-packaged insolvency mechanism to the Insolvency and Bankruptcy Code seeks to provide a hybrid corporate rescue process to MSMEs.

Pre-packs in insolvency in India: An expressway to debt resolution
The move of financial lenders to resolve their debts of Sathavahana Ispat through JC Flower ARC rather than resolving through the course of Insolvency proceedings seems to be at just the right moment when perhaps the sentiment of Financial Creditors, especially secured ones is getting against the much preferred and resorted to Insolvency and Bankruptcy Code.
Though earlier it was under talks that the farm laws agitation would delay the notification of pre-packaged insolvency resolution process, however, it seems that the Government sensed the change in the trends and hastened to notify the unique resolution process on 04th April 2021.
The newly introduced pre-packaged insolvency mechanism to the Insolvency and Bankruptcy Code seeks to provide a hybrid corporate rescue process to MSMEs due to their varied structure of business models when compared to the bigger conglomerates. The new rules primarily aimed to alleviate stress caused by pandemic cover Covid related defaults also are another bold move towards GoI’s vision to strengthen the MSME sector in the country.
This new legislative synthesis, available for defaults above 10 Lakhs has been rolled out on a beta model for MSME and extension to larger corporates would predominantly be based on its success. The process can be triggered voluntarily by an MSME after obtaining approval from sixty-six percent of Financial creditors or by special resolution of members and if initiated, it has to be disposed of first before considering any other applications for CIRP.
The approval of the Base Resolution Plan by 66 percent of Financial Creditors grants 90 days to the MSME to file for initiation of pre-pack resolution. The NCLT must within 30 days approve or reject the plan and the process is thereafter closed and only in critical cases of adverse management, rules provide for ordering of liquidation directly. In crucial circumstances, the RP may apply for vesting of management in his hands.
Analysing the differences and proposed impact of the pre-pack insolvency mechanism, provisions like dilution of shareholding or voting or controlling rights of the promoters in certain cases may indirectly take away the essence of the entire mechanism as the promoters might not be really inclined in doing away with his stakes.
Further, additional relaxations in the ineligibility under S.29 A of the I & B Code to the process could have given an impetus to ailing companies. However, at the same time to safeguard the interests of creditors from errant promoters, remedy with the CoC to resolve to convert the prepack into regular CIRP in case of fraud or mismanagement acts as a shield to prevent misuse or abuse of the process by promoters.
Another interesting feature of the new process is that the decisions taken by CoC are granted immunity in case there is a change in the constitution of the existing CoC. One major flaw in the amendment is the discretion with the CD to decide the amounts or qualify the status of a creditor as an FC or OC may be prejudicial to certain creditors. All in all, the pre-packaged insolvency process is a novel concept in the history of law in India and it is hoped that this mechanism may emerge as the panacea to the pace of proceedings under the Insolvency regime in India.
The author, Anjali Jain is Partner at Areness. The views expressed are personal
next story