Pre-packaged insolvency resolution framework could make a debut in the micro, small and medium enterprises (MSME) segment before being expanded to other sectors.
The government is drawing up a framework for resolution of MSMEs under the Insolvency and Bankruptcy Code (IBC), which could be rolled out soon, said a senior official.
“We may experiment with pre-packs for MSMEs and then expand it,” said the official, who did not wish to be identified.
A pre-packaged resolution is one where a company prepares a restructuring plan in cooperation with its creditors before initiating insolvency proceedings. This reduces the time and costs involved in the process.
The terms of such a resolution plan would have to be confidential until statutory proceedings begin and the process would involve very little time in court, said an official from the Insolvency and Bankruptcy Board of India (IBBI).
However, this would be subject to the approval of the government. A sub-committee under the Insolvency Law Committee is working on the framework, said the official.
In May, finance minister Nirmala Sitharaman had raised the threshold for initiating insolvency proceedings to Rs 1 crore from Rs 1 lakh to protect MSMEs from an adverse fallout of the pandemic and lockdown.
She also announced that a special insolvency framework for MSMEs would be notified under section 240A of the IBC.
Under existing pre-packaged insolvency regulations in the UK, the Statements of Insolvency Practice 16, require disclosures such as the full history of the decision-making process as to why pre-packaged insolvency was chosen.
Identity of the buyer along with its connection with the insolvent company or its shareholders is also to be disclosed.
In the US, under the pre-packaged bankruptcy regulations of Chapter 11, the debtor reaches an agreement with its key creditors and solicits acceptance for the plan prior to filing for bankruptcy.
As per the US Bankruptcy Code, the affected class of creditors must accept the proposed treatment by two-thirds in dollar value and a half in number of creditors voting.
Source: Economic Times