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Welcome Move for Pre-Packed Resolution

The government has done well to allow pre-packaged insolvency resolution plans for micro, small and medium enterprises (MSMEs) with defaults up to ₹1 crore. This debtor-initiated reorganisation plan in advance with creditors on board will give MSMEs a chance to rehabilitate themselves, rather than get liquidated. And those that cannot be restored would have their assets efficiently redeployed. Essentially, pre-packs underline the fundamental purpose of the Insolvency and Bankruptcy Code (IBC): swiftly bring back into a productive framework assets trapped in failing companies, rather than help banks and vendors recover their dues. Speed is vital when a company goes into distress to better the chances of its turnaround as a going concern. So, the time limit of 120 days for completion of a pre-packaged resolution plan is in order. It will help reduce the load on the National Company Law Tribunals.

When the pre-pack process is underway, the management and control will continue with the promoters and directors of the MSME. This will cause minimal disruption in the operations and is, therefore, welcome. However, the Committee of Creditors (CoC), by a 66% vote, can vest the management with the resolution professional (RP) after seeking court approval. If the plan proposed by the MSME is rejected by the CoC or where operational creditors’ dues are impaired, the RP can invite applications for a competing plan (read: akin to Swiss challenge). So, the CoC will be in the driver’s seat. Also, a pre-pack process initiated with an intent to defraud will attract a penalty.

Hardwiring pre-packs into the IBC (through an amendment) to prevent any misuse is fine. This is the first step, and pre-packs should be opened up to bigger MSMEs once the process stabilises.

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This piece appeared as an editorial opinion in the print edition of The Economic Times.



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