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The draft regulations seek to hasten the resolution process with the bulk of the discussions between debtors and creditors taking place out of court with court approval needed only for the agreed arrangement.
“The efficacy of out-of-court workouts in delivering speedier resolutions provided regulators extend the same regulatory exemptions as available to settlements made under the IBC framework was considered and it was felt that pre-packaged insolvency resolution process (PPIRP) may be introduced under the Code with necessary checks and balances, as an option for resolving insolvency,” the MCA said in a draft released on Friday.
Drawn up by a sub-committee of the Insolvency Law Committee, headed by MS Sahoo, chairman of the Insolvency and Bankruptcy Board of India, the proposed process seeks to prioritise resolution of Covid-related stress and defaults between Rs 1 lakh and Rs 1 crore.
Sections of the code relating to initiation of corporate insolvency remain suspended till March 25 as the Centre extended the suspension for a year. The sub-committee suggested the changes be brought in by ordinance “Given the urgency to roll out a prepack”.
The draft regulations allow for the corporate debtor (CD) to initiate the process with the consent of a simple majority of unrelated financial creditors and shareholders with the CD remaining under the control and possession of the existing promoters and management during the PPIRP.
The IBC may make a skeleton provision enabling prepack, leaving the informal part to market practice or self-regulation and best practices. These provisions would include the moratorium being available from the pre-pack commencement date till the closure of the process through the approval of a resolution plan or otherwise.
The PPIRP shall not result in a liquidation unless the committee of creditors decides to liquidate the CD with a 75% voting share, the draft rules stipulated, along with no dilution of section 29A of the IBC which defines the eligibility of a resolution applicant.
The sub-committee has suggested that the PPIRP should allow for 90 days for market participants to submit resolution plans to the adjudicating authority, which in turn shall have 30 days to approve it.
While the draft has recommended that prepacks should be available to address stress before a default as well, it also called for a phased approach to later include defaults above Rs 1 crore followed by those ranging from Rs 1 to Rs 1 lakh.
The MCA has sought public comments on the draft rules till January 22.
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