Scheme to resolve MSME bankruptcies finds few takers

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The plan introduced in April of last year to resolve bankruptcies of small enterprises has thus far been met with a lukewarm reception, which suggests that additional adjustments are required. The Insolvency and Bankruptcy Board of India (IBBI), responsible for drafting the rules governing bankruptcies, revealed that in the fiscal year FY22, only two companies were accepted into the programme known as “pre-pack.”

Pre-pack allows smaller companies to handle a significant portion of the work associated with resolving their bankruptcy issues outside of court. Shareholders and creditors can agree on a reorganisation plan and then submit it to the National Company Law Tribunal for approval. The most significant benefit of the plan is that, in contrast to typical bankruptcy processes, admission of the case does not result in the suspension of the management now in place. Following the plan, insolvency might be initiated after a payment default of ten lakh rupees, in contrast to the situation for larger enterprises, where the trigger is a default of one crore rupees or more.

An official of the government stated that the low adoption of the scheme might be ascribed to the government’s liquidity boosting measures and the alternative corporate restructure scheme offered by the Reserve Bank of India (RBI). However, according to the official, who requested that their name not be used, it may be too soon to think about a redesign.

The Reserve Bank of India (RBI) introduced a new programme in June 2019 that is expected to be a popular alternative to the Indian Business Corporation (IBC) procedure of reorganising companies. “Micro, small, and medium-sized enterprises, as well as their creditors, tend to favour alternative schemes to pre-pack schemes because these alternative schemes are simpler and more cost-effective than the complex pre-pack process outlined in the Insolvency and Bankruptcy Code (IBC).” “said Anoop Rawat, a partner at the law firm Shardul Amarchand Mangaldas & Co. who specialises in insolvency and bankruptcy law.

Rawat argues that extending the pre-pack system to larger companies is justified since it fulfils the needs of complex and large situations that need a quick bankruptcy settlement. This case allows expanding pre-packs. Pre-packaging can prevent asset deterioration in larger organisations. Stressed enterprises in industries whose intangible assets contribute significantly to value, such as a telecom company’s subscriber base or an airline’s routes, will be clear winners because the insolvency process will start with a strategy. Rawat cited a telecom company’s subscriber base. Tuesday, an email was addressed to the ministry of corporate affairs spokeswoman and IBBI for comment. Neither request was answered before publication.

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