Prepack insolvency: Rollout soon, Sahoo panel to submit report in 7-8 days

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October 15, 2020 5:10 AM

Under the existing IBC framework, a creditor can drag a debtor to the NCLT if default amount is Rs 1 crore or more.

The 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 have said.The 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 have said.

The government will likely roll out a ‘prepack’ insolvency framework soon, as a panel under Insolvency and Bankruptcy Board of India (IBBI) chairman MS Sahoo will submit its report later this month. In fact, the report on ‘prepack’ insolvency is expected to be handed over to the government in 7-8 days, IBBI wholetime member Sudhaker Shukla said on Wednesday.

The ‘prepack’ scheme is aimed at cutting costs as well as delay in resolving toxic assets and easing burden on the National Company Law Tribunal (NCLT) once the suspension of the insolvency proceedings against Covid-related default is lifted.

After the report is submitted, the government will take a final call on the roll-out, Shukla added.

As reported by FE earlier, 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 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 have 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. The government may have to amend the IBC to give a legal backing to the ‘prepack’ insolvency framework.

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 financial creditors typically. 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 NCLT.

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