Pre-packaged bankruptcy scheme to speed up insolvency resolutions pre-IBC

Analysts are divided in their opinions about the pre-packaged arrangement.

Pre-packaged bankruptcy scheme to speed up insolvency resolutions pre-IBC
Some analysts have said the scope of the definition is too broad to disqualify many people unless more clarity is brought in.

The government is exploring the feasibility of implementing a so-called “pre-packaged” bankruptcy scheme, prevalent in countries like the US, in India to aid the existing insolvency framework and cut costs and time of the resolution process.

The planned scheme, if implemented, will be a “pre-IBC (Insolvency and Bankruptcy Code) window for the resolution of stressed assets, which will complement the existing framework and not substitute it,” corporate affairs secretary Injeti Srinivas told FE on Monday. The secretary has asked the Insolvency and Bankruptcy Board of India to weigh the proposal and see if it can be adopted.

Explaining the idea of the proposed scheme, Srinivas pointed out that it won’t seek to dilute the existing IBC framework in any way and creditors can still tap the current IBC window if they don’t want any pre-IBC negotiations with debtors. The proposed scheme will only be an additional tool at disposal in case both creditors and debtors wish to avoid the usual litigations and rigour of the resolution process under the current IBC framework, which has been, in any case, immensely successful.

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The “pre-packaged bankruptcy scheme” will typically allow a stressed company to prepare a financial reorganisation plan with the approval of its at least two-thirds of creditors (and share-holders) before the filing of an insolvency application by any party at the National Company Law Tribunal (NCLT). The resolution plan so reached can then be placed before the NCLT for approval, so that it can be implemented.

Since the plan 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 to decongest the over-burdened NCLTs.

Since any such change in the insolvency framework needs a legal backing for it to be effective, it will be part of the IBC.

Under the existing IBC framework, a creditor can drag a debtor to the NCLT if it defaults on a repayment of Rs 1 lakh or more. Once the creditor’s application is admitted by the NCLT, the resolution process starts and it has to be wrapped up in a maximum of nine months. A stressed firm goes for liquidation if a resolution plan is not endorsed by two-thirds 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.

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Analysts are divided in their opinions about the pre-packaged arrangement. Sumant Batra, managing partner and head of insolvency practice at law firm Kesar Dass B & Associates, said: “Prepack will provide greater certainty and predictability to the insolvency resolution process as the resolution plan would have been pre-negotiated and agreed with financial creditors who would form members of the committee of creditors. The lenders will also ensure that the plan meets the parameters provided in the Code and the regulations so that it does not hit a roadblock in NCLT.”

However, Manoj Kumar, head (M&A, Transactions and Insolvency) at consultancy firm Corporate Professionals Capital, said: “Though the concept of pre-packaged insolvency resolution is quite relevant as it bring certainty in resolution and reduces the timelines drastically but in Indian context where the insolvency law and the eco-system around it is still evolving and most of the resolution is challenged at adjudication authority, it may be premature to introduce this concept right now.”

The IBC is already a very successful law. Last week, Srinivas said it has catalysed the recovery of around Rs 3 lakh crore from various defaults cases, directly or indirectly, since its inception in 2016. Also, the average recovery in the 60-odd insolvency cases that have seen resolution over the past two years has been to the tune of 46%, against just 26% under the earlier Board for Industrial and Financial Reconstruction (BIFR) regime.

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First published on: 27-11-2018 at 05:54 IST