Pre-pack scheme: Insolvency resolution time may be cut to just 3-4 months

The government is weighing a proposal to reduce by more than a half the time limit for the resolution of stressed assets under a so-called ‘pre-pack’ insolvency scheme. Any such move would not just expedite the resolution of bad debt but also cut costs. The “pre-pack” scheme will require amendments to the Insolvency and Bankruptcy Code (IBC) to take effect, and the government may introduce a Bill to this effect as early as the next session of Parliament, sources said. 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.

At present, under the IBC, the corporate insolvency resolution process has to be wrapped up within a maximum of 270 days. Of course, in many cases, especially the large ones recommended by the central bank that included Essar Steel and Bhushan Steel, the resolution process dragged on for months, far exceeding the mandatory time-frame. But that was primarily due to litigation.

While details are being worked out, the “pre-pack” scheme will typically allow a stressed company to prepare a financial reorganisation plan with the approval of its at least two-thirds of creditors (and share-holders). The resolution plan so reached can then be placed before the NCLT for approval and subsequent implementation. However, the fineprint of the scheme will be crucial to its success, analysts have said.

Under the extant IBC norms, a creditor can drag a debtor to the NCLT if the default amount is `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. “The time limit may be reduced to just 3-4 months under the ‘pre-pack’ scheme. The government is in the process of finalising the changes,” one of the sources said.

Data available with the Insolvency and Bankruptcy Board of India (IBBI) 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. Analysts have attributed this delay to the legal hurdles posed primarily by defaulting promoters’ dogged pursuit to hold on to their companies.

Earlier, the government had set up a committee under 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. Since a resolution plan under a “pre-pack” 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, especially after the lifting of the suspension of insolvency cases against fresh Covid-related defaults.

The government has already extended the suspension 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.