IBBI: Too early to think of a pre-packaging system for large companies
Insolvency and Bankruptcy Board of India (IBBI) Chairman MS Sahoo hinted at the possibility of rolling out the pre-pack insolvency regime in the future, currently limited to addressing stress among MSMEs, for large companies.
The pre-pack regime, introduced by the government in April through an ordinance, only allows the debtor to initiate his own bankruptcy proceedings with the approval of financial creditors with 66% of the voting rights. It aims to achieve faster resolution than the existing Corporate Insolvency Resolution (CIRP) process and reduce costs.
In an interview with FE, Sahoo said, âAn economic law is essentially empirical, and it continually evolves through experimentation. IBC is no exceptionâ¦. Therefore, I am not ruling out the possibility (of a pre-package system for large companies), but it is too early to think about it before I experiment with how it works for MSMEs. Even the IBC itself has evolved over time, he added. Analysts also called for the rapid introduction of such a program for large companies.
Sahoo exuded confidence that the recent IBBI regulations – which require insolvency professionals (IPs) to probe transactions made by promoters of struggling businesses for potential embezzlement – can be effectively enforced. “Recovering the value lost in avoidance transactions increases the likelihood of stress resolution through a resolution plan and discourages potential wrongdoers from engaging in such transactions, thereby preventing stress,” said the head of the insolvency regulator.
Already, PIs have in many cases unearthed avoidance transactions and filed applications with the National Company Law Tribunal (NCLT) for proper guidance, he said. As such, this is not a new obligation. âThe IBC is planning this for good reasons; IBBI only facilitates.
When asked if the idea behind the launch of the pre-pack program was to hold MSME debtors accountable, why the government required the ailing company to get two-thirds approval from financial creditors in order to be able to file the insolvency claim, Sahoo said: The basic idea is to provide a platform that allows the debtor and creditors to work out a resolution in a consensual manner, as part of the basic structure of the IBC.
In addition, the promoters and the existing management continue to manage the affairs of the troubled firm in the form of a pre-pack, unlike the usual CIRP where the resolution professional makes the decision with the advice of the financial creditors. â(So)â¦ it is only fair that creditors are taken into account, because they would be waiving their rights to initiate normal insolvency proceedings. If 66% of independent creditors disagree, the process could be an empty formality or take much longer to reach consensus, âSahoo said.
Commenting on the performance of the pre-pack program since its launch in April, Sahoo said it takes around three to six months for market forces to understand a new framework, compare it with other existing tools and prepare for it. ‘use. âThe prepack requires a prior agreement between the debtor and the creditors before initiating the formal process. It foresees 90 days of informal preparatory work before the start of the formal part. It is therefore too early to see the answer, âhe said.
To speed up the process, the government has required that prepackaged resolution plans be submitted in just 90 days and the NCLT will have an additional 30 days to approve them. The IBC currently allows a maximum of 270 days for the completion of the entire CIRP.
The scheme was introduced days after the government lifted a one-year stay on insolvency proceedings against Covid-related defaults.