Government puts out draft pre-pack scheme

By: |
January 10, 2021 5:00 AM

Pre-pack will usually see resolution and not end up with liquidation, except when the creditors decide to liquidate the corporate debtor with a 75% voting share.

As reported by FE earlier, the “pre-pack” scheme will be a pre-IBC window for resolution of toxic assets, which will only complement the existing framework but not substitute it.As reported by FE earlier, the “pre-pack” scheme will be a pre-IBC window for resolution of toxic assets, which will only complement the existing framework but not substitute it.

The government has proposed to roll out a so-called “pre-pack” insolvency scheme that will allow honest promoters to submit resolution plans for their stressed companies and it could be available for all corporate debtors and for any stress — pre and post default.

As per a draft pre-pack scheme, put out by the corporate affairs ministry, the government may begin by allowing this scheme for defaults from Rs 1 lakh to Rs 1 crore and Covid-19 defaults. This can be followed by defaults above Rs 1 crore, and then defaults from Rs 1 to Rs 1 lakh.

A corporate debtor will have to initiate pre-pack with the consent of a simple majority of unrelated financial creditors and shareholders. While eligible promoters will be allowed to bid, there will be no dilution of provisions of Section 29A disqualification criteria. Under the scheme, market participants will be allowed 90 days to submit the resolution plan to the adjudicating authority, which shall have 30 days to approve the plan.

Pre-pack will usually see resolution and not end up with liquidation, except when the creditors decide to liquidate the corporate debtor with a 75% voting share.

The scheme will require amendments to the IBC, and the government may introduce a Bill to this effect as early as the Budget session of Parliament. If adopted early, it will be a key tool at creditors’ disposal once the government lifts a suspension of the IBC process against Covid-related defaults from March 25, 2021, which may lead a sudden rise in insolvency cases.

As reported by FE earlier, the “pre-pack” scheme will be a pre-IBC window for resolution of toxic assets, which will only complement the existing framework but not substitute it.

Data available with the IBBI show, of the 1,942 ongoing cases as of September 2020, the resolution of as many as 1,442 has been dragging on beyond the mandatory 270 days. In many cases, analysts have attributed this delay to the legal hurdles posed primarily by defaulting promoters’ dogged pursuit to hold on to their companies. As many as 1, 025 firms have gone for liquidation.

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