Banks will likely have window to scout for prospective buyers of stressed assets for their expeditious resolution even before the bankruptcy process is initiated. This facility is set to be in place as part of a host of amendments being planned for the Insolvency and Bankruptcy Code (IBC), which is being reviewed by the government and the Insolvency and Bankruptcy Board of India (IBBI).
The so-called ‘pre-packs’ or pre-packaged resolutions, which have examples in many regimes including US and UK, will essentially allow a stressed firm to prepare a financial reorganisation plan with approval of its at least two-thirds of creditors (and shareholders) before the filing of an insolvency plea 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. The pre-packaged resolution scheme is expected to aid the existing insolvency framework and cut costs and time of the resolution process. Explaining the idea of the proposed scheme, corporate affairs secretary Injeti Srinivas had pointed out that it won’t seek to dilute the existing IBC framework in any way and creditors could still tap the current IBC window if they were averse to any pre-IBC negotiations with debtors. The proposed scheme would only be an additional tool at disposal in case both creditors and debtors wished to avoid the usual litigations and rigour of the resolution process under the current IBC framework.
Under the pre-packs scheme, banks could try and find an appropriate value for the bankrupt company before an insolvency petition is moved, leading to better chances of completing the transfer of assets within the time-frames stipulated in the code. IBBI, sources said, have circulated a discussion paper among its members on the subject. The paper is yet to be made public. Several large-ticket cases, such as Essar Steel, Bhushan Power and Steel and Alok Industries, have been languishing in courts for over two years now. Bankers are increasingly losing faith in the CIRP process and are now resorting to other methods of resolution, such as sales to asset reconstruction companies.
The practice of opting for pre-packs is a standard approach in the UK, on whose insolvency legislation the Indian code is based. “It is quite clear that a majority of the cases getting admitted under the IBC are not resolved within the prescribed timelines. When that happens, the value of the asset begins to get eroded and the odds of liquidation begin to rise,” explained a resolution professional (RP) on condition of anonymity. To increase the odds of a successful resolution and minimise the possibility of a company going into liquidation, RPs had written to the IBBI asking for the use of pre-packs to be formalised as part of the IBC.
Source: Financial Express, October 22, 2019