Success of pre-pack regime for MSMEs may open it for other borrowers

The Centre has promulgated the IBC Amendment Ordinance to allow pre-packaged insolvency process for MSMEs.

Experts said that if successful, the regime may be available for other corporate borrowers.

L. Viswanathan, Partner, Cyril Amarchand Mangaldas, said the government has cautiously introduced the pre-pack regime only for the MSME sector at this point of time, which is welcome.

“Depending on the success of the pre-pack regime for the MSME sector, one can expect this regime to be made available for other corporate borrowers”, he added.

The pre-pack regime comes with procedural checks and balances including applicability of Section 29 A and 2/3rd creditors’ consent for both initiation and approval of the base resolution plan.

Participation of eligible existing promoters is encouraged with the board continuing in control and the debtor proposing the base resolution plan. Operational creditors are protected by requiring market testing of the base resolution plan if it impairs the claims of operational creditors, he added.

In addition, the creditors committee can also convert the pre pack process to the usual CIRP by 66% majority at any time, or require the board to cease control through intervention of the NCLT in case of fraud or mismanagement by the existing management, he said.

Soumitra Majumdar, Partner, J. Sagar Associates, said The IBC Amendment Ordinance 2021 (“Ordinance”) makes available the pre-packaged route to genuine and viable cases, to ensure least business disruption.

“While modelled on debtor-in-possession approach, it vests significant consent rights to the financial creditors, such that the mechanism cannot be mis-used by errant promoters. Further, adopting plan evaluation process akin to Swiss Challenge, it retains competitive tension such that promoters propose plans with least impairment to rights and claims of creditors”, he said.

Majumdar said the ability of the committee of creditors to require dilution of promoter shareholding/ control, in cases of resolution plans submitted by the corporate debtor provides for impairment of any claims owed by such corporate debtor, should also be a significant deterrent against unreasonable terms in resolution plans.

“As we had seen in the past, contractual restructurings are fraught with major co-ordination problems, which should get adequately redressed by this route. Protecting the process from competing litigations and co-ordinating the consent process, this approach should solve issues arising from fragmented credit arrangements”, he said.

(The story has been published via a syndicated feed.)


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