‘Pre-pack scheme to cut costs and litigations’

The ‘pre-pack’ insolvency scheme proposed by the Sahoo panel will incentivise early identification of stress in the banking system, facilitate fast resolution of bad loans before the debtor faces substantial value erosion and reduce costs and litigation, analysts said on Sunday. A lot, however, will depend on the final fine print and the regulations of the scheme, they said.

The greater leeway provided to honest promoters, who will be able to submit the first resolution plan that will then face a Swiss challenge, will lead to more resolutions and less litigation, unlike the current process under the Insolvency and Bankruptcy Code (IBC).

According to the report submitted by the panel headed by Insolvency and Bankruptcy Board of India chairman M S Sahoo, the ‘pre-pack’ insolvency scheme will be available for any stress — pre-default and post-default. The implementation of the scheme can be phased, starting with resolution of defaults from `1 lakh to `1 crore and Covid-related defaults; this is to be followed by defaults above `crore, and then defaults from Rs 1 to Rs 1 lakh.

Resolution plans have to be submitted by bidders in 90 days, which will then have to be approved by the National Company Law Tribunal (NCLT ) in another 30 days. This is a much shorter time frame than the maximum of 270 days allowed under the extant IBC rules for corporate insolvency resolution.

Sudhir Chandi, director at merchant banking firm Resurgent India, said the prior consensus among various stakeholders reduces the possibility of litigation, as the concerns of various stakeholders are addressed at the negotiation stage itself. “It also reduces administrative costs, as most of the negotiations are carried out beforehand. The existing management remains in control of the operations of corporate debtor (CD). So there is minimal operational disruption, which will help retain the value of CD,” he added.

Rajiv Chandak, partner at Deloitte India, said: “The inclusion of a Swiss challenge will prevent future litigation from operational creditors who is seen to receive lower recoveries under the insolvency resolution process.

” The government may now consider setting up specific benches to deal with pre-packs to ensure that such cases are not delayed due to the heavy case load of NCLTs,” he added.

While the scheme looks promising, certain aspects need to be clarified, probably when the regulations are worked out. For instance, as Daizy Chawla, senior partner at Singh & Associates, points out, if the creditors are submitting their claims in response to the public annoucment on the pre-packaged insolvency of a debtor and after 90 days the process is closed with no resolution plan, whether the claims received will be considered as acknowledged or not.

Further, whether the limitation period, if it expires in case of any creditor during the moratorium period, will be revived after closure or not.

Chawla, however, added that these aspects will most probably be clear once the final law and regulations are out.

HIGHLIGHTS

Sahoo panel on ‘pre-pack’
Implementation may be phased, starting with defaults from Rs 1 lakh to Rs 1 cr and Covid defaults
Eligible promoters to retain control of debtors
Usually, promoters will submit a base plan, which will face Swiss challenge
No liquidation for defaults below Rs 1 cr and Covid-19 defaults
Resolution plan to be submitted in 90 days; NCLT to approve it in 30 days
IBC may be amended quickly to roll out pre-pack, preferably by an Ordinance