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Insolvency And Bankruptcy Code (Amendment Bill), 2021

Insolvency And Bankruptcy Code (Amendment Bill), 2021:

The government introduced the Insolvency and Bankruptcy Code (Amendment Bill), 2021 in the Lok Sabha.

  • The Bill is set to replace the Insolvency and Bankruptcy Code Amendment Ordinance 2021 promulgated in April 2021.
  • It introduced an alternate insolvency resolution process for Micro, Small and Medium Enterprises (MSMEs) with defaults up to Rs 1 crore called the Pre-packaged Insolvency Resolution Process (PIRP).
  • In March 2021 a sub-committee of the Insolvency Law Committee (ILC) recommended a pre-pack framework within the basic structure of the Insolvency and Bankruptcy Code (IBC), 2016.

Major Provisions:

  • Distressed Corporate Debtors (CDs) are permitted to initiate a PIRP with the approval of two-thirds of their creditors to resolve their outstanding debt under the new mechanism.
  • A corporate debtor is a corporate person who owes debt to any other person.
  • The PIRP also allows for a Swiss challenge to the resolution plan submitted by a CD in case operational creditors are not paid 100 % of their outstanding dues.
  • A Swiss Challenge is a method of bidding, often used in public projects, in which an interested party initiates a proposal for a contract or the bid for a project.

About PIRP:

  • A pre-pack is the resolution of the debt of a distressed company through an agreement between secured creditors and investors instead of a public bidding process.
  • This system of insolvency proceedings has become an increasingly popular mechanism for insolvency resolution in the UK and Europe over the past decade.
  • Pre-packs are largely aimed at providing MSMEs with an opportunity to restructure their liabilities and start with a clean slate while still providing adequate protections so that the system is not misused by firms to avoid making payments to creditors.
  • Unlike in the case of Corporate Insolvency Resolution Process (CIRP), debtors remain in control of their distressed firm during the PIRP.
  • Under the pre-pack system, financial creditors will agree to terms with a potential investor and seek approval of the resolution plan from the National Company Law Tribunal (NCLT).

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