The Insolvency And Bankruptcy Code (Amendment) Bill, 2021:
The Insolvency and Bankruptcy Code (Amendment) Bill, 2021, passed by Lok Sabha has proposed ‘pre-packs’ or Pre-packaged Insolvency Resolution Process (PIRP) as an insolvency resolution mechanism for Micro, Small and Medium Enterprises (MSMEs).
- A pre-pack envisages the resolution of the debt of a distressed company through a direct agreement between secured creditors and the existing owners or outside investors, instead of a public bidding process.
- Under the pre-pack system, financial creditors will agree to terms with the promoters or a potential investor, and seek approval of the resolution plan from the National Company Law Tribunal (NCLT).
- The approval of at least 66 per cent of financial creditors that are unrelated to the corporate debtor would be required before a resolution plan is submitted to the NCLT.
- The NCLTs will be required to either accept or reject an application for a pre-pack insolvency proceeding before considering a petition for a Corporate Insolvency Resolution Process (CIRP).
- One of the key criticisms of the CIRP has been the time it takes for resolution. The pre-pack in contrast, is limited to a maximum of 120 days with only 90 days available to stakeholders to bring a resolution plan for approval before the NCLT.
- Another key difference between pre-packs and CIRP is that the existing management retains control in the case of pre-packs; in the case of CIRP, a resolution professional takes control of the debtor as a representative of inancial creditors.
- This ensures minimal disruption of operations relative to a CIRP.
