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Business News/ Industry / Banking/  Government may introduce pre-packaged deals in IBC to mitigate covid-19 delays

Government may introduce pre-packaged deals in IBC to mitigate covid-19 delays

The pre-packaged scheme will already have a deal and the respective tribunal will just take it up for approval
  • With a huge backlog of cases, the NCLT benches are stretched and the current delay due to covid-19 will only add to it
  • Photo: iStockphotoPremium
    Photo: iStockphoto

    MUMBAI: Concerns over delay in arriving at bankruptcy resolutions amid the covid-19 pandemic has prompted the government to examine regulations for a pre-packaged Insolvency and Bankruptcy Code (IBC) scheme, said two people aware of the development.

    The scheme, which will have a pre-negotiated deal and the respective tribunal will just take it up for approval, is expected to ease the burden of the National Company Law Tribunal (NCLT).

    Shardul Shroff, executive chairman at law firm Shardul Amarchand Mangaldas & Co told Mint in an interview that pre-pack is a solution, where parties come forth with an existing offer. “You offer a settlement and submit it to the creditors committee and then the CoC would negotiate it to an agreeable level," said Shroff.

    With a huge backlog of cases, the NCLT benches are stretched and the current delay due to covid-19 will only add to it. A pre-pack provides certainty of resolution without going through the long-winded court process. Moreover, in a typical IBC case, there is always an uncertainty if people bid, and even if they do, whether lenders will accept it.

    Till December 2019, the bankruptcy tribunal has admitted 3,254 companies for resolution under IBC. Of this, resolution plans have been approved for 190 cases, 246 cases have been closed on appeal or review and 780 cases are headed for liquidation.

    “Pre-packs appear to be an attempt to see whether those cases can be settled and subjected to an order of the NCLT as binding on the parties. Pre-packs then are probably intended to lower the burden of the courts or the NCLT and effectively come out with an alternate solution which has the same effect of going through a CIRP," said Shroff.

    The plan to bring pre-packaged IBC has been in the works for some time now and experts feel that the current covid-19 situation might be a good time to implement it. The Ministry of Corporate Affairs (MCA) had, in April 2019, sought comments on pre-packaged IBC from various stakeholders.

    A panel of 11 members headed by UK Sinha, former chairman of Securities and Exchange Board of India (Sebi) is examining the issue to suggest a suitable framework. It is examining three modes --- pre-packaged insolvency resolution, pre-arranged insolvency resolution and pre-arranged sale.

    However, not everyone is convinced that pre-packaged IBC is the way to ease the burden of the bankruptcy tribunal. “What would really help is if the government increases the strength of the NCLT benches to tackle the growing number of cases and that, I feel, would be more effective than bringing new legislation," said Karan Kalra, founder, Bombay Law Chambers.

    Kalra said that there are already some provisions in the IBC that allows for quicker resolution of insolvency cases.

    “Take the Section 12A for instance which allows the case to be withdrawn by consent of lenders. One can use this provision if there are quicker solutions or deals available outside the IBC process after it has been admitted by the tribunal," he said, adding that while a pre-packaged deal increases certainty, it does not necessarily lead to value maximisation, the core principle of IBC.

    The practice of pre-packs was first developed in the USA, following the enactment of the Bankruptcy Reform Act of 1978. Soon after its introduction, it became so widely popular that in 1993, nearly one- fifth of all public bankruptcies were pre-packaged.

    Much like in the USA, the practice of pre-packs is well established and widespread in the UK, Netherlands, France and Germany.

    Sitesh Mukherjee, partner at law firm Trilegal, believes that a prepack may not work in Indian context as companies are largely promoter driven. "Only those bidders who are able to view the company from promoter's eyes will have an advantage here. There is a huge amount of asymmetry in terms of transparency and disclosures. This needs to be resolved before we think of having pre-packaged deals," said Mukherjee.

    Till December, 2019, a total of 135 cases have been withdrawn under Section 12A of IBC. Of these, 37 cases were withdrawn owing to full settlements with creditors and another 44 cases for other settlements with creditors, showed data from the Insolvency and Bankruptcy Board of India (IBBI).

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    Shayan Ghosh
    Shayan Ghosh is a national editor at Mint reporting on traditional banks and shadow banks. He has over 12 years of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.
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    Published: 06 May 2020, 05:54 PM IST
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