Centre Promulgates IBC Amendment Ordinance to Allow Pre-Packaged Insolvency for MSMEs

The Central Government has promulgated Insolvency and Bankruptcy Code (Amendment) Ordinance 2021 to allow pre-packaged insolvency process for MSMEs. The Ordinance, in essence, has amended the Insolvency and Bankruptcy Code 2016 and allows the Central Government to notify such pre-packaged process for defaults of not more than Rs 1 crore. The government had been looking to offer a pre-packaged resolution framework for stressed companies under the IBC. A pre-packaged resolution essentially translates to a company preparing a restructuring plan with its creditors before initiating insolvency proceedings. This helps to cut down the time and costs in the overall process.

A new chapter III A has been inserted that deals with pre-packaged insolvency resolution process. “An application for initiating pre-packaged insolvency resolution process may be made in respect of a corporate debtor classified as a micro, small or medium enterprise under sub-section (1) of section 7 of the Micro, Small and Medium Enterprises Development Act, 2006,” the Ordinance stated.

It is expected that the incorporation of Pre-Packaged insolvency resolution process for MSMEs in the Code will alleviate the distress faced by MSMEs due to the impact of the pandemic & the unique nature of their business, duly recognizing their importance in the economy. It provides an efficient alternative insolvency resolution framework for corporate persons classified as MSMEs for timely, efficient & cost-effective resolution of distress thereby ensuring positive signal to debt market, employment preservation, ease of doing business and preservation of enterprise capital. Other expected impact and benefits of the amendment in Code are lesser burden on Adjudicating Authority, assured continuity of business operations for corporate debtor (CD), less process costs & maximum assets realization for financial creditors (FC) and assurance of continued business relation with CD and rights protection for operational Creditors (OC).

In June 2020, the government promulgated an ordinance that suspended initiation of new insolvency proceedings for defaults. This came into effect from March 25 – the date when the nationwide lockdown commenced. The suspension of proceedings, which was initially for six months, was extended twice for three months each.

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