IBBI: Too early to think about pre-pack scheme for large firms

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Updated: August 03, 2021 10:29 AM

Already, IPs have, in many cases, unearthed avoidance transactions and filed applications with the National Company Law Tribunal (NCLT) for appropriate directions, he said.

In a corporate insolvency resolution process (CIRP), the competitive process runs for a substantial period, following which the highest resolution applicant is discovered.In a corporate insolvency resolution process (CIRP), the competitive process runs for a substantial period, following which the highest resolution applicant is discovered.

Insolvency and Bankruptcy Board of India (IBBI) chairman MS Sahoo has hinted at the possibility of rolling out the so-called pre-pack insolvency scheme, currently limited to the resolution of stress only among MSMEs, for large companies in future.

The pre-pack scheme, introduced by the government in April through an Ordinance, allows only the debtor to trigger its own bankruptcy process with the approval of financial creditors having 66% of voting power. It’s aimed at yielding faster resolution than the extant corporate insolvency resolution process (CIRP) and reducing costs.

In an interview with FE, Sahoo said: “An economic law is essentially empiric, and it evolves continuously through experimentation. IBC is no exception…. Therefore, I do not rule out the possibility (of a pre-pack scheme for big companies), but it is too early to think about it before experiencing how it pans out for MSMEs.” Even the IBC itself has evolved over time, he added. Analysts have called for the swift introduction of such a scheme for large corporations as well.

Sahoo exuded confidence that the recent IBBI regulations–which require insolvency professionals (IPs) to probe transactions carried out by the promoters of stressed firms to detect potential malfeasance—can be enforced effectively. “The clawback of value lost in avoidance transactions increases the likelihood of resolution of stress by a resolution plan and discourages the potential miscreants from indulging in such transactions, preventing stress,” the chief at the insolvency regulator said.

Already, IPs have, in many cases, unearthed avoidance transactions and filed applications with the National Company Law Tribunal (NCLT) for appropriate directions, he said. As such, it is not a new obligation. “The IBC provides for this for good reasons; the IBBI is merely facilitating.”

Asked if the idea behind launching the pre-pack scheme was to empower MSME debtors, why the government mandated that the stressed firm must obtain the approval of two-thirds of financial creditors to be able to file the insolvency application, Sahoo said: “The basic idea is to provide a platform which enables the debtor and creditors to work out a resolution consensually, within the basic structure of the IBC.”

Moreover, the promoters and the existing management continue to run the affairs of the stressed firm under pre-pack, unlike the usual CIRP where the resolution professional calls the shot with the guidance of the financial creditors. “(So)…it is only fair that creditors are taken on board, as they would be foregoing their rights to initiate a normal insolvency proceeding. If 66% of unrelated creditors are not on board, the process could be an empty formality or would take much longer to build consensus,” Sahoo said.

Commenting on the performance of the pre-pack scheme since its launch in April, Sahoo said it takes about three-six months for market forces to understand a new framework, compare it with other extant tools and prepare themselves to use it. “Prepack requires prior understanding between debtor and creditors before initiating the formal process. It envisages 90 days of informal preparatory work before the formal part begins. It is, therefore, too early to see the response,” he said.

To fast-track the process, the government has mandated that pre-pack resolution plans have to be submitted in only 90 days and the NCLT will have another 30 days to approve them. The IBC currently stipulates a maximum of 270 days for the completion of the entire CIRP.

The scheme was introduced days after the government lifted a one-year suspension of insolvency proceedings against Covid-related defaults.

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