By Elton Gomes
The Central government is set to introduce a quick rescue option for financial entities. The rescue option is likely to be finalized in boardrooms than in courts. Most importantly, it seeks to avoid prolonged and costly legal battles over the resolution of bankrupt companies, a top government official said, Live Mint reported.
The proposed new rescue option will ensure in seeking a timely resolution of bankrupt assets, which is crucial in preventing erosion in their value. The practice of such “pre-packaged” bankruptcy schemes is prevalent in the US and the UK.
What is the new process?
Under the pre-packaged bankruptcy schemes, creditors and shareholders will be able to approach a bankruptcy court with a pre-negotiated corporate reorganization plan. Through this step, the government aims to reduce litigation time and ensure that deadlines are met.
Corporate affairs secretary Injeti Srinivas said pre-negotiation among stakeholders under the proposed rescue option has to be done in a transparent way.
“We have to see if we need to recognize pre-packaged bankruptcy plans in the law or if it is something that we can do even now. We will ask the Insolvency and Bankruptcy Board of India (IBBI) to look into it,” Srinivas said in an interview, Live Mint reported.
The litigation aspect
Under the existing regime, to deal with insolvency matters, companies or their creditors move a bankruptcy tribunal to explore future options for the defaulting entity. The defaulting entity receives protection for a maximum of 270 days from any recovery of dues. During this period, litigation can significantly delay the resolution.
In several cases, the National Company Law Tribunal (NCLT) has not considered the time lost in litigation from the 270 days available for all parties to agree on a corporate rescue plan.
Experts have said that, under the pre-packaged scheme, creditors and shareholders would be able to move the bankruptcy court with an agreed scheme so that it is enforceable.
“Pre-packaged resolution schemes are prevalent in developed insolvency jurisdictions. It can significantly reduce the time taken as well as the intricacies of the resolution process. However, this may require an amendment to the law,” Sumant Batra, managing partner and head of insolvency practice at law firm Kesar Dass B & Associates, told Live Mint.
How are bankrupt firms currently dealt with?
To initiate bankruptcy proceedings against firms, the Central government introduced the Insolvency and Bankruptcy Code (IBC), 2016. IBC 2016 details the insolvency processes for individuals, companies, and partnership firms.
The law has brought a significant change in the power-sharing equation between creditors and debtors by giving them both the power to initiate proceedings against each other.
When a company defaults on a payment of at least Rs 1 lakh, an insolvency application can be made either by the company’s creditors or debtors to the NCLT. The NCLT then appoints an interim insolvency resolution professional (IRP), and the defaulting company is placed under a moratorium. Once an IRP is appointed, the defaulting company’s board gets suspended till the resolution process is complete.
The IRP then forms a committee of creditors of the company, which appoints the final insolvency resolution professional (IP). The IP then drafts a resolution plan, which requires the approval of the committee of creditors within 180 days, with a grace period of another 90 days. The resolution plan will also need the final approval of the NCLT. If the plan does not get approved within 270 days, the company is headed for liquidation.
Which Indian companies have faced bankruptcy proceedings?
As per an October 2017 report in the Financial Express, the Reserve Bank of India (RBI) stated that 12 companies were identified for immediate bankruptcy proceedings, while 488 others have been given six months time to restructure their debt or be dragged to the NCLT. Some of these 12 companies are:
Bhushan Steel Ltd: Bhushan Steel, the largest manufacturer of auto-grade steel in India, has defaulted on loans worth Rs 44,478 crore. The State Bank of India (SBI), the lead bank of the consortium of lenders, moved the NCLT for recovery of its loan.
Essar Steel Ltd: Essar Ltd has been one of the biggest steel companies in India and abroad as well. It has a loan default worth Rs 37,284 crore. Essar challenged the RBI’s direction in the Gujarat High Court, which was later dismissed.
Jaypee Infratech Ltd: Jaypee Infratech is a subsidiary of the conglomerate Jaypee Group. It has defaulted on loans worth Rs 9,635 crore. In August 2017, the NCLT had admitted an insolvency petition filed by IDBI bank, but the Supreme Court stayed the order after home buyers filed petitions against the move.
The Times of India, in August 2018, reported that banks will have to initiate bankruptcy proceedings against several corporate defaulters. The total value of loans in these 60-odd accounts, which are already classified as non-performing assets (NPAs), is expected to be around Rs 3.5 lakh crore.
Elton Gomes is a staff writer at Qrius
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