While promoters who are wilful defaulters are expressly banned from bidding for firms under the insolvency process, the so-called ‘pre-pack’ scheme being ushered in, with a view to enabling early detection of stress and quick resolution, will provide a special facility for promoters with no history of defaulting wilfully.
Under the scheme, meant only for NPAs less than a year old, the eligible promoters will get to submit resolution plans first. Once the promoter’s bid is received, other suitors can also make their offers under the Swiss challenge method. The idea is to facilitate transparent and market-driven offers for the stressed assets.
The move is important as bankers are wary of taking decisions on haircut on their own for fears of possible investigations later. Also, the scheme will likely fast-track the resolution of a stressed company before its value erodes substantially.
The “pre-pack” scheme will only be for the resolution of toxic assets, and not for liquidation. So, if resolution efforts fail, creditors can wrap up the process and are free to initiate proceedings under the existing Insolvency and Bankruptcy Code (IBC). To cut delay and cost, the scheme may also have a much shorter time limit for resolution — less than a half of the maximum of nine months prescribed under the IBC.
The scheme will require amendments to the IBC, and the government may introduce a Bill to this effect as early as the Budget session of Parliament. If adopted early, it will be a key tool at creditors’ disposal once the government lifts a suspension of the IBC process against Covid-related defaults from March 25, 2021, which may lead to a sudden rise in insolvency cases.
As reported by FE earlier, the ‘pre-pack’ scheme will be a pre-IBC window for resolution of toxic assets, which will only complement the existing framework but not substitute it.
“Even under the current IBC framework, promoters (who are not wilful defaulters) are allowed to bid for their companies if the NPA is less than one-year old. So, pre-pack isn’t diluting the essence of the Section 29-A of the IBC (which deals with the disqualification criteria) with regard to promoters,” an industry source said. As such, promoters of stressed MSMEs, barring the wilful defaulters, are already allowed under the IBC to bid, irrespective of the period of the NPAs.
Importantly, unlike the usual IBC process, the management of the stressed firm will continue to run it unless the company finally changes hand. The resolution professional, in this case, will have a limited role. He will just oversee the entire resolution process but not run the company.
To initiate the pre-pack process, the approval of more than a half of creditors as well as shareholders of the debtors will be required. The lenders and the debtors can then approach the National Company Law Tribunal (NCLT) for permission to start the process. However, the final resolution plan needs to be approved by at least 66% of creditors, in sync with the IBC requirement. This will then be placed before the NCLT for clearance and subsequent implementation.
Earlier, the government had set up a committee under Insolvency and Bankruptcy Board of India (IBBI) chairman MS Sahoo to submit a report on ‘pre-pack’ insolvency. The planned amendments are expected to be based on the Sahoo panel report, which was submitted about two months ago.
Manoj Kumar, head (M&A, transactions and insolvency) at consultancy firm Corporate Professionals Capital, said: “As there is an expectation of increasing the number of insolvency cases as the suspension on new cases would be lifted in March 2021, it would be a good idea to bring pre-pack insolvency provisions beforehand. Pre-packaged resolutions process might help to resolve early stage bankruptcy situations of many viable businesses and would reduce the burden of insolvency resolution system.”
Sudhir Chandi, director at Resurgent India, said: “The distinguishing feature of a pre-pack insolvency resolution is that it is a speedy procedure which addresses the stress of the entity and provides for a restructuring plan in a cost-effective manner without resorting to the initiation of insolvency proceedings.”
Data available with the IBBI show, of the 1,942 ongoing cases as of September 2020, the resolution of as many as 1,442 has been dragging on beyond the mandatory 270 days. In many cases, analysts have attributed this delay to the legal hurdles posed primarily by defaulting promoters’ dogged pursuit to hold on to their companies. As many as 1, 025 firms have gone for liquidation.