MCA: 60% Eligible for pre-pack turnaround Scheme

The Ministry of Corporate Affairs (MCA) recently announced that six out of ten active Indian companies are eligible for the new pre-packaged bankruptcy scheme. This is because out of the 1.3 million active companies in India, 60% belong to the category of MSME (Micro, Small and Medium Enterprises).

Background

The President of India recently promulgated an ordinance, Insolvency and Bankruptcy Code Amendment Ordinance, 2021. The ordinance will allow pre-packaged insolvency resolution process for the MSMEs.

Now, the GoI has announced that it has decided on a minimum payment default threshold of Rs 10 lakhs for the initiation of pre-pack resolution process.

Benefits of Pre-Pack Insolvency Bankruptcy resolution scheme

  • The main advantage of the scheme is that the major part of the work is done informally. This includes the turnaround plan for the business as well.
  • Unlike the general provisions that are provided for the larger companies, this resolution scheme does not displace the existing management.
  • The scheme includes several provisions to prevent abuses.

How is Pre-Packaged Deal different?

In the Pre-packaged insolvency framework, the stressed borrower can prepare a plan for settlement or resolution. This will avail the option of sale of the company before going to the IBC court. In other words, the pre-packaged insolvency framework is a kind of restructuring where the borrower can benefit from the approval of the creditors without going through IBC process.

Bottom line, the scheme helps the MSME borrowers to retain control of the enterprise till a settlement is reached. Therefore, his chances to regain control of the company increases. In the usual IBC cases, the borrowers do not have a role when the case reaches NCLT court.

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