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What is the news? The President of India promulgates the IBC Amendment Ordinance 2021. It allows the use of Pre-Pack insolvency resolution.
About Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021:
- IBC Amendment Ordinance 2021 amends the Insolvency and Bankruptcy Code, 2016.
- The Amendment allows the use of Pre-Packaged insolvency resolution as an alternative resolution mechanism for MSMEs. The threshold limit to trigger the Pre-Packaged insolvency resolution is between Rs 10 lakh to 1 Crore.
What is Pre-Pack insolvency resolution?
- A pre-pack resolution is a form of restructuring that allows creditors and debtors to work on an informal plan and then submit it for approval.
- Under this system, financial creditors will agree to the terms of a potential investor. Further, they will seek approval of the resolution plan from the National Company Law Tribunal (NCLT).
- However, the resolution plan cannot be submitted directly to NCLT. It requires approval of a minimum of 66% of financial creditors that are unrelated to the corporate debtor before submission of a resolution plan.
- Further, NCLTs also require to consider any application for a pre-pack insolvency proceeding before considering a Corporate Insolvency Resolution Process(CIRP).
- CIRP is the process of resolving corporate insolvency according to the provisions of the Insolvency and Bankruptcy Code, 2016.
Benefits of Pre-Packs over CIRP:
- One of the key criticisms of the CIRP is the time taken for resolution. At the end of December 2020, over 86% of the ongoing insolvency resolution proceedings crossed the 270-day threshold.
- In contrast, the pre-pack resolution process is limited to a maximum of 120 days. Further, only 90 days are available to the stakeholders to bring the resolution plan to the NCLT.
- Another key difference between pre-packs and CIRP is that the existing management retains control in the case of pre-packs. Whereas a resolution professional takes control of the debtor as a representative of financial creditors in the case of CIRP.
Source: Indian Express