Govt working on ‘prepackaged’ insolvency scheme to cut insolvency delays

By: |
September 29, 2020 8:30 AM

The plan is to launch the scheme as soon as the suspension of the insolvency proceedings against Covid-related default is lifted.

However, with present timelines under the code, the objective sometimes gets frustrated.”However, with present timelines under the code, the objective sometimes gets frustrated.”

The government has started work on a so-called “prepackaged” insolvency scheme, with a view to offering more options to lenders as well as borrowers for the resolution of bad debt, sources told FE. The scheme is also meant to cut costs as well as delays in resolving toxic assets and ease the burden on the National Company Law Tribunal (NCLT).

The plan is to launch the scheme as soon as the suspension of the insolvency proceedings against Covid-related default is lifted.

While details are being worked out, the “prepack” proposal, first mooted in 2018, will typically allow a stressed company to prepare a financial reorganisation plan with the approval of its at least two-thirds of creditors (and shareholders).
The resolution plan so reached can then be placed before the NCLT for approval and subsequent implementation. The idea is to aid the existing insolvency framework and cut costs and time required for the resolution process.
The planned scheme, if implemented, will be a pre-IBC (Insolvency and Bankruptcy Code) window for the resolution of toxic assets, which will only complement the existing framework but not substitute it, industry sources said.

However, the fineprint of the scheme, once approved and notified, will be crucial.

Data available with the Insolvency and Bankruptcy Board of India show, of the 2,108 ongoing cases as of June 2020, the resolution of as many as 1, 094 has been dragging on beyond the mandatory 270 days, primarily due to legal hassles.

“Prepack” will only be an additional tool at disposal in case both creditors and debtors wish to avoid the usual rigour of the resolution process under the extant IBC framework, which has been, in any case, more successful than other debt-recovery/resolution instruments.

Since the “prepack” insolvency framework needs a legal backing for it to take effect, the IBC will have to be amended for this purpose.

The sources say since a resolution plan under a “prepack” arrangement is already endorsed by the lenders, it will effectively bypass various requirements and interventions by the NCLT at different stages under the usual IBC process, thus, reducing litigation costs and delays. It will also help decongest the over-burdened NCLTs.

Under the existing IBC framework, a creditor can drag a debtor to the NCLT if default amount is Rs 1 crore or more. Once the creditor’s application is admitted by the NCLT, the resolution process starts and it has to be wrapped up in 180 days, which can be extended by a maximum of 90 days. A stressed firm goes for liquidation if a resolution plan is not endorsed by 66% of its committee of creditors, comprising typically financial creditors. NCLT is involved in various stages of the process — right from admitting application to approval of resolution plans or even an extension of the timeframe for resolution by a maximum of three months.

The government has already extended the suspension of insolvency cases against fresh Covid-related defaults by three months from September 25, upon the expiry of a six-month deadline last week. The idea was to help cash-strapped firms tide over the Covid impact without the fears of getting dragged to the National Company Law Tribunal (NCLT).

Sudhir Chandi, director at Resurgent India, said: “Prepacked is an efficient way of disposing of a stressed asset, where the seller gets a better value and can avoid the value deterioration during the CIRP period. The core objective of the Code is reorganisation of corporate person while maximising the value of its assets in a time-bound manner and the pre-pack insolvency scheme adheres to and advances this objective of the Code. However, with present timelines under the code, the objective sometimes gets frustrated.”

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