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    Government sets minimum default threshold at Rs 10 lakh for MSME prepack insolvency resolution

    Synopsis

    This distancing of the resolution professional will also work as a countermeasure to the debtor-in-control model that works in such pre-packaged resolutions.

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    The threshold default for initiating the pre-packaged insolvency resolution process will be set at Rs 10 lakh and above for micro, small and medium enterprises, said MS Sahoo, chairman of the Insolvency and Bankruptcy Board of India (IBBI).

    Further, to maintain the resolution professional’s independence from the corporate debtor, the RP's fees for the pre-packed resolution will be decided by the Committee of Creditors (CoC), Sahoo said during a virtual conference on Thursday.

    This distancing of the resolution professional will also work as a countermeasure to the debtor-in-control model that works in such pre-packaged resolutions.

    In this arrangement, the existing management continues to run the company as opposed to creditors taking charge in regular bankruptcy process.

    The pre-packaged insolvency resolution (PIRP) framework envisages multiple roles and responsibilities for the insolvency professional (IP)—mediation between the corporate debtor and CoC before initiation of the court process and monitoring the resolution process.

    In case of fraudulent transactions, the CoC can hand over the management of the corporate debtor to the resolution professional.

    In case the CoC decides the process needs to be converted into a corporate insolvency resolution process, the resolution professional becomes the interim resolution professional as in regular insolvency cases.

    “For all these phases, the regulation will enable the CoC to decide upfront how much fees will be paid to the IP and the CD (corporate debtor) shall keep that money aside in a separate bank account, which will be used to pay the fees of the IP,” Sahoo said.

    Discussions in the IBBI were in an advanced stage and the PIRP regulations will be released soon, he added.

    The applicability of Section 29A of the Insolvency and Bankruptcy Code (IBC) to the PIRP was to ensure that only those corporate debtors who have clean intentions can take advantage of the PIRP, according to GK Singh, joint secretary, ministry of corporate affairs.

    “Those who are coming with a clean hand and want some kind of quick restructuring and where the creditor is also onboard (will be allowed to initiate PIRP). We didn’t want to allow everyone the option of debtor-in-possession,” Singh said, addressing the conference.

    Section 29A, as applied to the PIRP, will restrict wilful defaulters and other such categories from pre-packaged resolution.

    According to Singh, the most important part of the resolution professional’s role in the PIRP would be to find out if there is a case of avoidance transactions within a limited time period, a task made more difficult due to the debtor-in-control model.

    “There should be no perception that this debtor-in-possession model is to avoid all kinds of wrongdoing,” Singh said, adding that the RP will have to be mindful of his dual role of helping the corporate debtor finding a resolution while at the same time being a watchdog in the process.


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