The Lok Sabha on Wednesday cleared the Insolvency and Bankruptcy Code amendment bill that lays down the framework of a simpler alternative bankruptcy resolution framework for small businesses.

The bill seeks to replace an ordinance issued in April to roll out the ‘pre-pack’ scheme as an urgent measure. The simpler and alternative bankruptcy resolution scheme was offered on 4 April as the one-year suspension of bankruptcy action for defaults during the pandemic had expired in March and the authorities wanted to offer a simpler bankruptcy resolution scheme to small businesses in parallel. The pre-pack scheme is a less time-consuming and informal one up to a stage. Besides, the filing fee is also less than in the general bankruptcy provisions.

The most important feature of the pre-pack scheme is that unlike general bankruptcy provisions, proprietors or major shareholders of a small business do not lose operational control of the business to lenders once a pre-pack insolvency scheme commences. This is very important for small businesses because the best person to run the firm would be its promoters who get orders on the basis of personal relationships and are experts in that business. Also, getting outsiders to run small businesses may be a difficult task to achieve. The ‘debtor-in-control’ feature ensures that the business does not suffer any disruption. The ordinance said that the government felt it was expedient to provide an “efficient alternative insolvency resolution process for corporate persons classified as MSMEs (micro, small and medium enterprises)” under the IBC. The idea is to ensure quicker, cost-effective and value-maximizing outcomes for all the stakeholders, in a manner which is least disruptive to the continuity of the businesses and also preserves jobs.

Almost 60% of the over 1.3 million active companies in the country are eligible for the pre-pack bankruptcy resolution scheme. That is because a large part of the functional companies fit in the definition MSMEs which are incorporated. Proprietorships are not covered by the scheme. An MSME which has not met its payment obligation of 10 lakh could, either on its own initiate a pre-pack bankruptcy resolution scheme with approval from lenders, or lenders representing 66% of the debt of the business could initiate the process. Under the scheme, lenders have extensive oversight but the business in distress enjoys moratorium from all recovery proceedings and remains in control of the operations so that there is no disruption to business and employment.

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