Now, Micro, Small and Medium Enterprises (MSMEs) can seek resolution for their financial stress through the pre-packaged process under the Insolvency and Bankruptcy Code (IBC) promulgated on 4th April’21 through Ordinance.
Pre-packaged resolution process can urgently address the specific requirements of MSMEs relating to the resolution of their insolvency.
Quick Resolution: Quick resolution of stressful state can save an MSME entity from value erosion which may erode due to delay in resolution and ultimately making resolution difficult. Pre-pack process enables a faster resolution with least erosion of entity value which ultimately increases the possibility of resolution.
Cost Effective: Since the process takes less time so managed cost effectively. Since the Corporate Debtor continues with the existing management during pre-pack, it avoids the cost of disruption of business as it does not shift management to Interim Resolution Professional (IRP) to RP and then to successful Resolution Applicant (RA ) and continues to retains employees, suppliers, customers, and investors.
Group resolution: Given that resolution of a group of companies can be value-adding as compared to a separate insolvency proceeding for each company in distress, many jurisdictions are contemplating to make available an enabling framework for the same.
With the enactment of the Insolvency and Bankruptcy Code, 2016 (IBC/Code), an altogether new insolvency regime that is proactive, incentive compliant, market led, and time-bound, came into existence in India. The Code and the underlying reforms, in many ways, was a journey into an unchartered territory – a leap into the unknown and a leap of faith. This will enhance confidence of lenders, suppliers & stakeholders to remain transparent in business operation to mitigate future contingencies.
A company in stress often resolves stress on its own by improving its competitiveness at marketplace. It may not, however, succeed always. It may sit across a table with its stakeholders, either individually or collectively, to work out a plan to resolve stress. It may resort to a formal framework which provides a guided path for resolution and defines the role of stakeholders in the framework for resolution of stress.
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The Govt. has set a payment default of Rs. 10 lakhs as the trigger for bankruptcy proceedings of small businesses under the new simplified scheme for insolvency resolution called pre-packs.
It is been termed as “Rescue Technique” with mix of formal & casual proceedings for insolvency resolution.
The finance ministry stated in a tweet that this will be the minimal threshold of payment default for micro, small and medium enterprises (MSMEs) below the pre-Pack scheme.
“Pre-pack for MSMEs is a hybrid company rescue technique, which blends factors and virtues of each formal and casual insolvency proceedings. A resolution plan is negotiated among the debtor and its lenders before commencement of formal proceedings,” the ministry stated in a sequence of tweets.
This threshold of charge default is plenty decrease than the Rs. 1 crore threshold otherwise relevant below the Insolvency and Bankruptcy Code (IBC) for beginning bankruptcy proceedings in the case of non-MSME businesses.
In the case of large companies, if the charge default standards are met, even one lender should provoke court cases towards the defaulter. However, in the case of MSMEs, the procedure may be commenced only by creditors accounting for 66% of the business’ debt. A voluntary initiation of pre-pack scheme could want 75% shareholder approval sponsored through lenders representing 66% of debt.
The authorities delivered a modification to IBC through way of an Ordinance on Monday to provide an opportunity turnaround possibility for small agencies facing stress because of the monetary downturn as a result of the pandemic. The scheme takes under consideration the unique circumstances in which MSMEs function.
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Pre-packed insolvency resolution process is available for limited MSME Entities
Less Number of entities registered on Udyam Registration:
As per the data available with Udyam Registration approx 25 lakhs MSMEs have been registered till date. This essentially means that the unregistered MSMEs exceed the registered MSMEs by a large number & they can’t take recourse under the pre-packaged regime for insolvency resolution.
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Beyond this there is a further restriction that the pre pack resolution extends to only companies and Limited Liability Partnerships and keeps sole proprietorship, partnerships and Hindu Undivided Family forms of MSMEs out of the ambit of the pre pack process thereby further restricting the number of MSMEs eligible for pre pack.