The Lok Sabha in 2021, passed the Insolvency and Bankruptcy Code (Amendment) Bill, 2021, which seeks a pre-packaged insolvency resolution framework for micro, small, and medium-sized businesses.
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The bill repeals the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021, which was passed when Parliament was not in session on April 4, 2021, and amends the Insolvency and Bankruptcy Code, 2016.
A pre-packaged insolvency resolution process is an alternate approach to offering a corporate bailout plan for MSMEs.
A debtor starts and participates in the settlement processes with lenders through an informal approach under this framework. Once the company’s promoters and secured creditors have reached an agreement on a resolution plan, they can seek approval from the National Company Law Tribunal.
An MSME that has not fulfilled its payment obligation of Rs 10 lakh might initiate this plan with consent from lenders who have advanced 66% of the debt amount.
The present corporate insolvency resolution process (CIRP) framework involves creditors taking an insolvent borrower to the bankruptcy court for a time-bound resolution, and the procedure permits other entities to bid for the stressed entity.
A stressed unit’s promoter cannot bid for it under CIRP. The company’s activities are overseen by a resolution professional, and the incumbent promoters must step down. The resolution professional is also in charge of managing the bidding and resolution process, which has a 270-day deadline.
Before approaching the NCLT, the stressed borrower can establish a resolution plan with the creditors, which could include selling the company to an investor, under the pre-packaged resolution model. Until a settlement is reached, the borrower holds management control of the company.
The resolution’s time restriction has been shortened to 120 days – 90 days to submit a resolution plan and 30 days for the NCLT to accept or reject it. In the event of a takeover, promoters can also bid for their companies.