Rajyasabha has passed amended insolvency and bankruptcy code during the ongoing monsoon session. With that, a new term - ‘prepackaged resolution' - has started doing rounds among the economists and analysts community.
With the new amendment, the parliament has officially added more teeth to the insolvency and bankruptcy code and removed the red tap, which made IBC notoriously famous for its snail pace and lack of progress.
What is ‘Pre-packaged’ Resolution Process?
Under pre-packaged insolvency proceedings, informal proposals are brought under the ambit of IBC. With this, out-of-court resolutions will also be recognised under insolvency law along with the formal court proceedings.
This move is expected to remove bureaucratic hurdles and court's interference. All the concerned parties will arrive at a mutually agreed resolution. It is a big breakthrough for the entire IBC process as it will remove the conflicts and restrict the number of court cases after the resolution is declared. Hence, the entire recovery process can gather momentum.
Why Is It Important?
The introduction of informal plans under IBC's ambit will save time and cost of bankruptcy proceedings. It will be particularly helpful to small businesses in distress.
Explaining the rationale behind the bill, Finance Minister Nirmala Sitharaman said that the number of cases under insolvency is expected to rise among MSMEs under the impact of the second COVID-19 wave. Pre-pack solutions are aimed at simplifying the process, which will help to ensure a speedy recovery.
Closing Comments
Another important feature of pre-pack solvency schemes is that small businesses will continue to have operational control of their enterprises.
In the words of the Finance Minister, the debtor will be still in control, and the creditors will be working together. It will actually cut the cost and increase the speed as the whole thing will be over in 120 days.
