Lok Sabha passes Insolvency and Bankruptcy Code (Amendment) Bill 2021

On 28th July, 2021, Lok Sabha has passed the Insolvency and Bankruptcy Code (Amendment) Bill 2021. This Bill replaces the Insolvency and Bankruptcy Code (Amendment) Ordinance 2021 which was implemented on 4th April, 2021.

Key Points

  • Insolvency is a situation where a company or an individual are unable to pay their debt.
  • The government has notified that the threshold of a default which does not exceed Rs 1 crore for the initiation of a pre-packaged resolution process remains unchanged.
  • On 4th April, 2021, government amended the Insolvency and Bankruptcy Code 2016 by putting forward an ordinance that provides for pre-packaged resolution process for the micro, small and medium enterprises (MSMEs) when the Parliament is not in session.
  • The pre pack is merely an informal way of providing a corporate rescue plan for which approval from the National Company Law Tribunal (NCLT) will be sought.
  • Under this ordinance, a pre-packaged insolvency resolution process (PIRP) was established that provides an alternate MSME insolvency resolution process.

What is pre-packed insolvency resolution mechanism?

Pre-packed insolvency resolution mechanism is a procedure in which a resolution arrangement is decided upon between the lender and the debtor before approaching the NCLT for receiving an approval. Under this pre-pack framework, a debtor will initiate and participate in the resolution proceedings in tandem with the lender. This is done through an informal process that helps in avoiding costly and lengthy court procedures.

Corporate Insolvency Resolution Process (CIRP)

As stated in the Insolvency and Bankruptcy Code (IBC), under the existing corporate insolvency resolution process (CIRP), a maximum number of 270 days is provided for the resolution process to be completed. To take control of the administration a resolution professional (RP) is appointed and the promoters have to step down. The appointed RP then manages the resolution and bidding process, which generally takes several months. Under the new pre-pack scheme, the time limit for the resolution will be reduced and the participants will get 90 days to submit resolution plans and NCLT will to approve them in another 30 days.

Rule for MSME

An MSME not having met its Rs 10 lakh payment obligation, could either initiate a pre-pack bankruptcy resolution scheme on its own with the approval of the lenders or the lenders who are representing the 66% debt of the business could themselves initiate the process.

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