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  • The Ministry of Corporate Affairs (MCA) has set up a committee to look into the possibility of including what are called “pre-packs”
  • Under the current insolvency regime to offer faster insolvency resolution under the Insolvency and Bankruptcy Code (IBC)

What is insolvency and bankruptcy?

  • Insolvencyis when individuals or companies are unable to repay their outstanding debt.
  • Bankruptcy is when a court has declared a person or other entity insolvent, having passed appropriate orders to resolve it and protect the rights of the creditors.
  • It is a legal declaration of one’s inability to pay off debts.

Insolvency and Bankruptcy Code

  • Enacted in 2016, it applies to companies and individuals.
  • As of 2015, insolvency resolution in India took 4.3 years on an average.
  • Thus enacted to streamline and speed up the resolution process of failed businesses.
  • The Code consolidates provisions of previous legislative framework to form a common forum for debtors and creditors of all classes to resolve insolvency.

  • The code stipulates that the resolution process of a stressed company will have to be completed in a maximum of 270 days.
  • Enacted in 2016, it applies to companies and individuals.
  • As of 2015, insolvency resolution in India took 4.3 years on an average.
  • Thus enacted to streamline and speed up the resolution process of failed businesses.
  • The Code consolidates provisions of previous legislative framework to form a common forum for debtors and creditors of all classes to resolve insolvency.

institutions to facilitate resolution of insolvency

  • Insolvency Professionals
  • Insolvency Professional Agencies
  • Information Utilities
  • Adjudicating authorities
  • Insolvency and Bankruptcy Board

When does the IBC apply?

  • In March this year, the government raised the threshold for invoking insolvency under the IBC to
  • Rs 1 crore from Rs 1 lakh
  • With a view to prevent triggering of such proceedings against small and medium enterprises

Current issues

  • Slow progress in the resolution of distressed companies has been one of the key issues raised by creditors regarding the Corporate Insolvency Resolution Process (CIRP) under the IBC,
  • With 738 of 2,170 ongoing insolvency resolution processes having already taken more than
  • 270 days at the end of March.

So, What is a pre-pack?

  • It is an agreement for the resolution of the debt of a distressed company through an agreement between secured creditors and investors instead of a public bidding process.
  • The process needs to be completed within 90 days so that all stakeholders retain faith in the system.

Benefits

  • Faster resolution than the traditional CIRP.
  • Lower the burden on the NCLTs.
  • The incumbent management retains control of the company until a final agreement is reached.
  • The distressed company can continue to operate during the period.

drawbacks of pre-pack?

  • The key drawback of a pre-packaged insolvency resolution is the reduced transparency compared to the CIRP as financial creditors would reach an agreement with a potential investor privately and not through an open bidding process.
  • Experts said this could lead to stakeholders such as operational creditors raising issues of fair treatment when financial creditors reach agreements to reduce the liabilities of the distressed company.
  • Also, unlike in the case of a full-fledged CIRP which allows for price discovery,
  • In the case of a pre-pack the NCLT would only be able to evaluate a resolution plan based on submissions by the creditors and the investor.

Remember

  • The proposed pre-packaged resolution would likely be subject to approval by the NCLT.

 
 

 

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