The pre-pack insolvency scheme will yield quicker resolution and assistance maximise the worth of a stressed firm, the chief of the insolvency regulator stated, refuting the notion that a shorter time frame for submission and clearance of a resolution strategy below the proposed scheme may perhaps not draw the most effective bidder.
“In fact, the market is getting ready for ‘ultra-fast pre-pack’,” MS Sahoo, chairman of the Insolvency and Bankruptcy Board of India (IBBI) who headed an official panel on pre-pack insolvency, told FE in an interview. Under this strategy that envisages even quicker resolution, two stressed firms in the US — Full Beauty Brands and Sungard Availability Services — emerged from Chapter 11 bankruptcy in just 24 hours and 19 hours, respectively, he highlighted.
The government earlier this month produced public the Sahoo panel report. Stakeholders are necessary to submit inputs by January 22.
Pre-pack makes it possible for 90 days to applicants to submit resolution plans and a different 30 days to NCLT to approve or reject them. However, the extant Insolvency and Bankruptcy Code (IBC) envisages 180 days, extendable to 270 days, for the completion of the whole corporate insolvency resolution procedure (CIRP).
Despite the stipulated time frame below the extant IBC framework, CIRP in numerous higher-profile instances – from Essar Steel and Bhushan Steel to Bhushan Steel and Power – got inordinately delayed, thanks to litigations, triggered mostly by defaulting promoters. The IBBI information show, of the 1,942 ongoing CIRP instances as of September 2020, the resolution of as several as 1,442 had been dragging on beyond the mandatory 270 days.
However, due to the fact the creditors and the debtors currently arrive at a concensus on initiating the pre-pack resolution, probabilities of frivolous litigations below the proposed framework are minimised, analysts say.
Operational creditors below the pre-pack framework, the IBBI chief stated, will be entitled to the exact same protection as out there to them below the extant IBC guidelines and their rights will not be diluted. Pre-pack has the “rigour and discipline” of the IBC and it does not impair rights of any party beyond what is offered for in a CIRP, he stressed.
Sahoo stated the pre-pack framework gives two optional approaches for the committee of creditors (CoC) for the resolution and maximisation of stressed asset worth. If the base resolution strategy, submitted by the eligible promoter, realises dues of operational creditors in complete, the CoC may perhaps approve it (topic to meeting other needs), with no placing the stated strategy to Swiss challenge.
“If the base plan does not realise dues of operational creditors in full, the CoC must put the said plan to Swiss challenge and approve the better of the base plan and Swiss challenger plan, subject to minimum entitlement of operational creditors and dissenting financial creditors,” he stated.
He explained that pre-pack, by style, will stay clear of some tasks of the CIRP like “appointment of an interim resolution professional, and executes some tasks before commencement like preparation of draft information memorandum”. This will assistance conclude the resolution procedure quicker.
“The USP of pre-pack is that it takes less time for conclusion, increasing the probability of revival of a firm, at a higher value. Longer time for resolution typically depletes the value of the firm and increases resolution costs associated with time, making the possibility of revival bleak,” Sahoo stated.
The Sahoo panel report has recommended that when no liquidation is permitted for Covid defaults and defaults up to Rs 1 crore, this is permitted for non-Covid defaults above Rs 1 crore. Asked why liquidation is permitted, even in a restricted sense, when resolution is the main concentrate of the pre-pack scheme, Sahoo stated it is permitted exactly where the CoC considers that liquidation is the only alternative for the resolution of pressure of the firm. It will also need the approval of creditors getting as considerably as 75% of voting share. “It does not serve much purpose to initiate CIRP in such cases, letting further depletion of value, and then proceed for liquidation with 66% of voting share,” he stated.