“In fact, the market is getting ready for ‘ultra-fast pre-pack’,” MS Sahoo, chairman of the Insolvency and Bankruptcy Board of India (IBBI) who headed an official panel on pre-pack insolvency, told FE in an interview.
The pre-pack insolvency scheme will yield faster resolution and help maximise the value of a stressed firm, the chief of the insolvency regulator said, refuting the notion that a shorter time frame for submission and clearance of a resolution plan under the proposed scheme may not draw the best bidder.
“In fact, the market is getting ready for ‘ultra-fast pre-pack’,” MS Sahoo, chairman of the Insolvency and Bankruptcy Board of India (IBBI) who headed an official panel on pre-pack insolvency, told FE in an interview. Under this approach that envisages even faster resolution, two stressed firms in the US — Full Beauty Brands and Sungard Availability Services — emerged from Chapter 11 bankruptcy in just 24 hours and 19 hours, respectively, he highlighted.
The government earlier this month made public the Sahoo panel report. Stakeholders are required to submit inputs by January 22.
Pre-pack allows 90 days to applicants to submit resolution plans and another 30 days to NCLT to approve or reject them. However, the extant Insolvency and Bankruptcy Code (IBC) envisages 180 days, extendable to 270 days, for the completion of the entire corporate insolvency resolution process (CIRP).
Despite the stipulated time frame under the extant IBC framework, CIRP in several high-profile cases – from Essar Steel and Bhushan Steel to Bhushan Steel and Power – got inordinately delayed, thanks to litigations, caused mainly by defaulting promoters. The IBBI data show, of the 1,942 ongoing CIRP cases as of September 2020, the resolution of as many as 1,442 had been dragging on beyond the mandatory 270 days.
However, since the creditors and the debtors already arrive at a concensus on initiating the pre-pack resolution, chances of frivolous litigations under the proposed framework are minimised, analysts say.
Operational creditors under the pre-pack framework, the IBBI chief said, will be entitled to the same protection as available to them under the extant IBC rules and their rights won’t be diluted. Pre-pack has the “rigour and discipline” of the IBC and it does not impair rights of any party beyond what is provided for in a CIRP, he stressed.
Sahoo said the pre-pack framework offers two optional approaches for the committee of creditors (CoC) for the resolution and maximisation of stressed asset value. If the base resolution plan, submitted by the eligible promoter, realises dues of operational creditors in full, the CoC may approve it (subject to meeting other requirements), without putting the said plan to Swiss challenge.
“If the base plan does not realise dues of operational creditors in full, the CoC must put the said plan to Swiss challenge and approve the better of the base plan and Swiss challenger plan, subject to minimum entitlement of operational creditors and dissenting financial creditors,” he said.
He explained that pre-pack, by design, will avoid some tasks of the CIRP like “appointment of an interim resolution professional, and executes some tasks before commencement like preparation of draft information memorandum”. This will help conclude the resolution process faster.
“The USP of pre-pack is that it takes less time for conclusion, increasing the probability of revival of a firm, at a higher value. Longer time for resolution typically depletes the value of the firm and increases resolution costs associated with time, making the possibility of revival bleak,” Sahoo said.
The Sahoo panel report has suggested that while no liquidation is allowed for Covid defaults and defaults up to Rs 1 crore, this is permitted for non-Covid defaults above Rs 1 crore. Asked why liquidation is allowed, even in a limited sense, when resolution is the primary focus of the pre-pack scheme, Sahoo said it is permitted where the CoC considers that liquidation is the only option for the resolution of stress of the firm. It will also require the approval of creditors having as much as 75% of voting share. “It does not serve much purpose to initiate CIRP in such cases, letting further depletion of value, and then proceed for liquidation with 66% of voting share,” he said.