Explained: What is Insolvency and Bankruptcy Code (Amendment) Bill, how is it useful?

New Delhi, Aug 03: The Insolvency and Bankruptcy Code (Amendment) Bill, 2021 proposes a pre-packaged insolvency resolution mechanism for micro, small and medium enterprises. This Bill, was passed in the Lok Sabha in July.

It can be seen that the bill replaces the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021, which was promulgated on April 4, when Parliament was not in session, and amends the Insolvency and Bankruptcy Code, 2016.

The proposed amendments will enable the government to notify the threshold of a default not exceeding Rs 1 crore for initiation of the pre-packaged resolution process.

The government has already prescribed the threshold of Rs 10 lakh for this purpose.

The bill proposes a new chapter in the IB Code to facilitate the pre-packaged insolvency resolution process for corporate persons that are Micro, Small and Medium Enterprises (MSMEs).

What is a pre-packaged insolvency resolution mechanism?

A pre-packaged insolvency resolution mechanism is an alternative method of providing a corporate rescue plan for MSMEs.

Under this, a debtor initiates and participates in the resolution proceedings with lenders through an informal process. Once the promoters of the company and the secured creditors agree on a resolution plan, they can approach the National Company Law Tribunal for approval.

How does it differ from CIRP?

Under CIRP, the promoter of a stressed unit cannot bid for it. A resolution professional is appointed to oversee the company's activities and the incumbent promoters have to step down. The resolution professional also manages the bidding and resolution process, for which there is a 270-day deadline.

Under the pre-packaged resolution model, the stressed borrower can prepare a resolution plan with the creditors, which could involve selling the company to an investor, before approaching the NCLT.