Pre-packaged insolvency fails to take off as bankers wary of voluntary haircuts

Bankers are wary of voluntary haircuts and potential investigations, leading them to opt for the regular insolvency route.
Bankers are wary of voluntary haircuts and potential investigations, leading them to opt for the regular insolvency route.


The pre-pack model of insolvency resolution for smaller firms has failed to gain traction due to concerns of impropriety by bankers. Only four companies have used the scheme since its introduction in April 2021.

New Delhi: The pre-pack model of insolvency resolution introduced over two years ago to speed up the rescue of smaller firms has failed to take off, as bankers worry that the voluntary haircuts they opt for could lead to allegations of impropriety in the future. This, despite the fact that court approvals mandatory for all bankruptcy rescues, offer protection in case of an investigation.

Bankers have come under scrutiny in some recent cases, such as the one involving former State Bank of India chairman Pratip Chaudhuri, which has prompted them to be more cautious, legal experts added.

The Pre-packaged Insolvency Resolution Process (PPIRP) was introduced in April 2021 as an alternative mechanism for defaults by micro, medium and small enterprises (MSMEs) in 2021.

However, latest data from the Insolvency and Bankruptcy Board of India (IBBI) showed only four companies have taken the PPIRP route, including Shree Rajasthan Sintex, Sudal Industries, Enn Tee International and GCCL Infrastructure and Projects. The scheme was introduced to ensure faster resolution of cases when matters were dragging far beyond the 270-day threshold. At the time of its introduction, the average resolution time stood 540-560 days.

“The whole idea behind making NCLT approval mandatory for pre-packaged insolvency cases was to improve transparency and ensure bankers don’t face any impropriety- related issues in the future." said Bahram Vakil, co-founder & senior partner, AZB & Partners. “Also, the scheme contains some onerous requirements on lenders and debtors. The government is in the process of simplifying some of these requirements, and we are hopeful that the route will take off."

Typically, during a resolution process, creditors move the National Company Law Tribunal (NCLT) if a company defaults on its debt, and once the case is admitted, a moratorium is imposed on all dues. Bankers call bids from potential suitors and accept the best offer, which involves taking some losses, or haircuts.

However, in the pre-pack scheme, which was introduced as a semi-formal model, there is no bidding; bankers themselves find a new buyer and agree on a voluntary haircut, keeping the original management in place, and without disrupting its operations.

“There is a fear among bankers that they could be subject to potential vigilance investigations in future if any allegations of impropriety arise. Even if the banker who approved the haircut has retired, there would still be liability on them," said a leading insolvency lawyer, seeking anonymity. “Hence, bankers are taking the regular IBC route even in cases where PPIRP can be used."

According to a banker looking after stressed assets, lenders are not averse to haircuts as it is common even for selling loans, but it depends on specific loans and vary from bank to bank. That said, the banker said, state-run lenders are usually more careful because they fear being pulled up for their decisions after years. “Moreover, there have been cases of bankers coming under the lens for loan sales like that of Chaudhuri who was arrested in 2021 over a small value loan sale," he said.

“Although PPRIP was brought in to resolve and restructure stressed assets and not push borrower accounts into insolvency, it failed to take off well," said Sushmita Gandhi, partner at Induslaw. “Voluntary haircuts, and the inherent conflict between creditors and debtors are mostly the reasons for fewer lenders opting for this framework. Since it requires lenders to take strong decisions on large haircuts, most lenders are wary of taking responsibility for such decisions which may be questioned at a later date and lead to allegations of favour and indiscretion," she added.

Legal experts said PPIRP was meant to be a semi-formal process to speed up the process. However, the requirement for court approval has led to a situation where they take the same time as regular IBC cases due to the pendency of cases at legal forums.

“Pre-pack framework was introduced as a semi-formal process as compared to Corporate Insolvency Resolution Process. However, the cases at hand showcase that it has ended being a court-driven process," Nishant Singh, partner, Luthra and Luthra Law Offices India, said. “The voluntary haircuts and inherent conflict between the creditor and debtor could be reasons for fewer initiation under the framework."

Shayan Ghosh contributed to the story

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