Govt amends IBC, rolls out pre-pack plans for MSMEs

The ordinance introduces a new chapter in the Insolvency and Bankruptcy Code to offer the pre-pack scheme to those defined as medium and small enterprises or MSMEs under the MSME Development Act.

The Union government on Monday moved an ordinance to introduce pre-packaged insolvency resolution options for micro, small and medium enterprises (MSMEs), following global best practices.

An ordinance was promulgated to amend the Insolvency and Bankruptcy Code (IBC) on April 4. (MINT)

The ordinance introduces a new chapter in the Insolvency and Bankruptcy Code to offer the pre-pack scheme to those defined as medium and small enterprises or MSMEs under the MSME Development Act. The scheme also covers businesses incorporated as partnerships, in addition to companies.

The scheme is available to entities that have neither undergone bankruptcy proceedings in the preceding three years nor are facing liquidation orders.

Pre-packs are a form of restructuring that allow creditors and debtors to work on an informal plan and then submit it for approval. The incumbent management typically retains control until the final deal..

The scheme disallows a business to avail of the scheme if the major shareholder is an undischarged insolvent or wilful defaulter. The most significant feature is that, unlike the general bankruptcy provisions, it allows the management of the defaulting small business to continue to be in control of operations.

Corporate debtors remaining in possession is a global best practice in such schemes. “Pre-pack gives you a platform where you can do a resolution as ‘debtor in possession’ rather than creditor in control under resolution professional. That’s the major distinction. The company under debtor in possession is able to arrive at a solution. In IBC, the bulk of the litigation is by promoters, which creates roadblocks for resolution,” said Ajay Shaw, partner, DSK Legal.

Businesses can voluntarily file for a pre-pack scheme by adopting a special resolution by the board or by a resolution by three-fourths of the partners. The scheme stipulates that though the control stays with the management, it has to “make every endeavour to protect and preserve the value of the property of the corporate debtor, and manage operations as a going concern.”

The existing management of the defaulting small business is allowed to be in control of the affairs of the firm during the pre-pack resolution process as chances of new investors lining up for small businesses are fewer than those for large companies.