Regulation should be light-touch, however, and pre-packs should cover larger companies.
The government’s move to amend the insolvency law to allow pre-packaged insolvency resolution plans for micro, small and medium enterprises (MSME) with defaults of not more than ₹1 crore is welcome. The Insolvency and Bankruptcy Code (Amendment) Bill, 2021, that seeks to replace an Ordinance, will enable the creditor and the debtor to informally work on a rehabilitation plan (instead of financial bidding) without a bankruptcy court’s involvement. It will reduce the court’s load and, more importantly, provide MSMEs an opening to rebuild themselves rather than be liquidated.
Pre-packs underscore the core purpose of the code: speedy redeployment of assets trapped in failing companies, rather than credit recovery. Global experience shows that pre-packs have broadly been successful in preserving enterprise value. When a company goes into distress, speed is crucial to improve the chances of its turnaround as a going concern. So, the time limit of 120 days to complete the resolution plan (that includes 90 days for creditors to approve the plan and 30 days for approval or termination by the National Company Law Tribunal) should be understood as the outer limit, rather than the norm. Termination of the pre-pack process will result in liquidation of the debtor. Allowing the management and control of the company to continue with promoters when the pre-pack process is underway makes sense as it will minimise disruption in the operations. A creditor-appointed overseer could be appointed, in cases of fraud and gross mismanagement.
Penalty for fraudulent or malicious initiation of pre-packs, as also for bad-faith conduct of a pre-pack, is a welcome check. Regulation should be light-touch, however, and pre-packs should cover larger companies.