Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 – UPSC Prelims

IBC Amendment Ordinance 2021 amends the Insolvency and Bankruptcy Code, 2016.

The Amendment allows the use of Pre-Packaged insolvency resolution as an alternative resolution mechanism for MSMEs. The threshold limit to trigger the Pre-Packaged insolvency resolution is between Rs 10 lakh to 1 Crore.

A pre-pack resolution is a form of restructuring that allows creditors and debtors to work on an informal plan and then submit it for approval.

Under this system, financial creditors will agree to the terms of a potential investor. Further, they will seek approval of the resolution plan from the National Company Law Tribunal (NCLT).

However, the resolution plan cannot be submitted directly to NCLT. It requires approval of a minimum of 66% of financial creditors that are unrelated to the corporate debtor before submission of a resolution plan.

NCLTs also require to consider any application for a pre-pack insolvency proceeding before considering a Corporate Insolvency Resolution Process(CIRP).

CIRP is the process of resolving corporate insolvency according to the provisions of the Insolvency and Bankruptcy Code, 2016.

One of the key criticisms of the CIRP is the time taken for resolution. At the end of December 2020, over 86% of the ongoing insolvency resolution proceedings crossed the 270-day threshold.

In contrast, the pre-pack resolution process is limited to a maximum of 120 days. Further, only 90 days are available to the stakeholders to bring the resolution plan to the NCLT.

Another key difference between pre-packs and CIRP is that the existing management retains control in the case of pre-packs. Whereas a resolution professional takes control of the debtor as a representative of financial creditors in the case of CIRP.