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Success of pre-pack regime for MSMEs may open it for other borrowers
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SME Times News Bureau | 06 Apr, 2021
The Centre has promulgated the IBC Amendment Ordinance to allow pre-packaged insolvency process for MSMEs.
Experts said that if successful, the regime may be available for other corporate borrowers.
L.
Viswanathan, Partner, Cyril Amarchand Mangaldas, said the government
has cautiously introduced the pre-pack regime only for the MSME sector
at this point of time, which is welcome.
"Depending on the
success of the pre-pack regime for the MSME sector, one can expect this
regime to be made available for other corporate borrowers", he added.
The
pre-pack regime comes with procedural checks and balances including
applicability of Section 29 A and 2/3rd creditors' consent for both
initiation and approval of the base resolution plan.
Participation
of eligible existing promoters is encouraged with the board continuing
in control and the debtor proposing the base resolution plan.
Operational creditors are protected by requiring market testing of the
base resolution plan if it impairs the claims of operational creditors,
he added.
In addition, the creditors committee can also convert
the pre pack process to the usual CIRP by 66% majority at any time, or
require the board to cease control through intervention of the NCLT in
case of fraud or mismanagement by the existing management, he said.
Soumitra
Majumdar, Partner, J. Sagar Associates, said The IBC Amendment
Ordinance 2021 ("Ordinance") makes available the pre-packaged route to
genuine and viable cases, to ensure least business disruption.
"While
modelled on debtor-in-possession approach, it vests significant consent
rights to the financial creditors, such that the mechanism cannot be
mis-used by errant promoters. Further, adopting plan evaluation process
akin to Swiss Challenge, it retains competitive tension such that
promoters propose plans with least impairment to rights and claims of
creditors", he said.
Majumdar said the ability of the committee
of creditors to require dilution of promoter shareholding/ control, in
cases of resolution plans submitted by the corporate debtor provides for
impairment of any claims owed by such corporate debtor, should also be a
significant deterrent against unreasonable terms in resolution plans.
"As
we had seen in the past, contractual restructurings are fraught with
major co-ordination problems, which should get adequately redressed by
this route. Protecting the process from competing litigations and
co-ordinating the consent process, this approach should solve issues
arising from fragmented credit arrangements",he said.
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