Prolonged litigation derails operations of the defaulting company, lets assets idle and lose their value, leads to job losses, and also affects efficiency of the bankruptcy resolution process
New Delhi: Bulk of corporate bankruptcy cases pending in tribunals have breached the 270-day timeframe for finding a resolution, owing to prolonged litigation by shareholders and potential investors, the ministry of corporate affairs has said.
Citing the latest figures available from the Insolvency and Bankruptcy Board of India (IBBI), the ministry said in its monthly update of the corporate sector that over 86% of the 1,717 bankruptcy resolution cases in tribunals have been going on for more than 270 days.
Prolonged litigation derails operations of the defaulting company, lets assets idle and lose their value and leads to job losses. It also affects efficiency of the bankruptcy resolution process. Litigation between shareholders and potential investors happen as shareholders resist decisions taken with respect to the company by its lenders and the professional hired by them to run the company. “Shareholders remain in control of businesses so long as they ensure the dues are paid by the company. Once the company defaults, lenders get an upper hand in decision making," explained a government official.
The government is now banking on the recently introduced ‘pre-packaged’ or informal bankruptcy resolution scheme to address such delays and help stitch together corporate turnaround plans within 120 days -- 90 days for shareholders and lenders to submit a plan and a month for the tribunal to clear it. The pre-pack scheme, rolled out in April, allows shareholders and lenders to informally prepare a revival plan before moving the tribunal.
Pre-packs will reduce dependence financially stressed businesses have on adjudicating authorities, the ministry said. It will also “unburden the tribunals by reducing the number of cases clogging the system, leading to swifter disposal of other cases," the ministry said. The scheme was rolled out by way of an ordinance to pre-empt a surge in bankruptcy cases once the one-year suspension of bankruptcy action against defaulting firms was lifted on 25 March.