Bankrupt firms in India to get a new and quick rescue option
Under the so-called ‘pre-packaged’ bankruptcy schemes, creditors and shareholders will approach a bankruptcy court with a pre-negotiated reorganization plan, as prevalent in countries such as the US and the UK
New Delhi: The Union government is set to introduce a quick corporate rescue option, which will be finalized mostly in boardrooms than in courts, as it seeks to avoid prolonged and costly legal battles over the resolution of bankrupt companies, said a top government official. Under the so-called “pre-packaged” bankruptcy schemes, creditors and shareholders will approach a bankruptcy court with a pre-negotiated corporate reorganization plan, as prevalent in countries such as the US and the UK.
With this step, the government aims to cut down on litigation and ensure that deadlines are met. A time-bound resolution of bankrupt assets is crucial as it would help prevent any erosion in their value. A consensual approach to corporate rescue will also save cost.
Corporate affairs secretary Injeti Srinivas said pre-negotiation among stakeholders under the proposed scheme has to be done in a transparent way. “We have to see if we need to recognize pre-packaged bankruptcy plans in the law or if it is something that we can do even now. We will ask the Insolvency and Bankruptcy Board of India (IBBI) to look into it,” Srinivas said in an interview.
IBBI is responsible for implementing the Insolvency and Bankruptcy Code (IBC).
Under the existing regime, companies or their creditors move a bankruptcy tribunal to explore future options for the defaulting entity, which receives protection for a maximum of 270 days from any recovery of dues. Litigation during this period, a frequent event in big cases referred to tribunals by banks, delays the resolution.
The National Company Law Tribunal (NCLT) has in many cases excluded the time lost in litigation from the 270 days available for all parties to agree on a corporate rescue plan to avoid viable companies from slipping into liquidation. India’s new bankruptcy regime, which became fully operational by December 2016, has so far led to the resolution of about 60 cases.
Experts said that under the pre-packaged scheme, creditors and shareholders would move the bankruptcy court with an agreed scheme so that it gets sanctity and becomes enforceable.
Without the court’s approval, a pre-arranged scheme remains just a commercial contract and enforcement becomes tricky if one of the parties eventually backs out.
“Pre-packaged resolution schemes are prevalent in developed insolvency jurisdictions. It can significantly reduce the time taken as well as the intricacies of the resolution process. However, this may require an amendment to the law,” said Sumant Batra, managing partner and head of insolvency practice at law firm Kesar Dass B & Associates.
Many large cases of default referred to bankruptcy tribunals, prodded by the Reserve Bank of India, have witnessed intense litigation as major shareholders resisted losing control of their prized assets and potential investors either sought to protect their rights or get their rivals disqualified.
Bad loans worth about ₹10 trillion have crimped the ability of India’s state-run banks to lend to new projects. Allowing pre-packaged bankruptcy deals could sidestep the difficulties associated with lengthy court proceedings for bankrupt businesses.
“This is something for which the time has come,” said Batra.
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