Don’t let the pre-pack get IBC off-track

By: |
December 29, 2020 6:45 AM

If the pre-pack resolutions allow promoters to regain the upper hand, the very purpose of the IBC will be destroyed

In this context, the government seems to feel that the process needs to be modified and is working to introduce a pre-pack scheme. In this context, the government seems to feel that the process needs to be modified and is working to introduce a pre-pack scheme.

While it may have been in the interest of both banks and borrowers to put the IBC in abeyance for six months given the disruption caused by the pandemic, the three-month extension till March 31, 2021, could have been avoided. The resolution is already taking much longer than anticipated, with even 270 days proving inadequate and, therefore, it is preferable the process begins as early as possible. Also, given several legal precedents have been set during the past couple of years, one would have expected less litigation in recent cases. However, promoters seem to have succeeded in delaying the process with frivolous claims. If the corporate insolvency resolution process (CIRP) is to be more effective, the NCLT and NCLAT benches need to be far stricter to make sure companies don’t try and de-rail the process. While the IBC was necessary and has empowered hapless lenders to take errant borrowers to task, the benches have not worked quickly enough. That has proved to be expensive because, as we saw in the Essar Steel case, banks were losing hundreds of crores each day.

In this context, the government seems to feel that the process needs to be modified and is working to introduce a pre-pack scheme. In a report submitted to the ministry of corporate affairs late last month, the IBBI has recommended a 90-day pre-pack resolution. The idea is to try and speed up the process as also possibly minimise the role of the interim resolution professional, who seems to have been, more often than not, hampered in her efforts by lack of adequate resources. The lenders and the promoters are expected to come up with a solution, even as the existing management continues to run the company. The approval of the NCLT would be sought as a mere formality once a solution has been hammered out.

There is no doubt the CIRP needs to be a lot faster and free of litigation; apart from the creditors, it also needs to make sure prospective buyers don’t lose their appetite. However, the pre-pack scheme needs to be well-defined and monitored so that promoters don’t end up getting the upper hand. Also, the pre-pack scheme cannot be aimed at a mere financial restructuring—as in the erstwhile CDR mechanism—and must ideally involve a change of promoters. The CDR mechanism, as has been well documented, was a complete failure with banks taking big haircuts and promoters retaining the company at little extra cost. It would be a pity if that were to be repeated; ideally, the incumbent promoters should be replaced. Also, the services of the interim resolution professionals should not be dispensed with; they are required to ensure that the promoters do not strip the company of key assets—physical and financial—during the resolution period. Bankers, too, need to have enough representatives on the board and perhaps even on the audit committee. The RP could call for bids from prospective buyers and scrutinise them together with the CoC, ensuring that late bids are not entertained. Moreover, the RP is needed to ensure that the interests of operational creditors are kept in mind.

For all its flaws, the IBC has shown errant promoters they can no longer retain their businesses if they turn defaulters. It is critical the pre-pack legislation is as strong. Else, banks will once again be at the mercy of the promoters.

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