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An Overview of the Pre pack mechanism for MSME Insolvency
- The central government has promulgated an Insolvency and Bankruptcy Code (Amendment) Ordinance allowing the use of Pre packs as an insolvency resolution mechanism for Micro, Small and Medium Enterprises (MSMEs) with defaults up to Rs 1 crore.
- What are Pre packs?
A. It is a resolution of the debt of a distressed company through an agreement between secured creditors and investors instead of a public bidding process.
B. The financial creditors agree to terms with a potential investor and seek approval of the resolution plan from the National Company Law Tribunal (NCLT).
- Salient features:
A. The approval of a minimum of 66 per cent of financial creditors that are unrelated to the corporate debtor would be required.
B. NCLTs are also required to either accept or reject any application for a pre-pack insolvency proceeding.
C. It is limited to a maximum of 120 days with only 90 days available to the stakeholders to bring the resolution plan to the NCLT.
D. Existing management retains control in the case of pre-packs while a resolution professional takes control of the debtor as a representative of financial creditors in the case of Corporate Insolvency Resolution.
E. The mechanism is available only to a MSME.
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