“Resumption of IBC will lead to an increase in cases, prepackages need the hour”
The lifting of the stay of new insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) on March 25 is expected to lead to a sharp increase in insolvency cases according to experts who noted that the rapid inclusion a pre-pack mechanism would help reduce the increased burden on insolvency courts. The central government last year suspended the opening of insolvency for any default occurring after March 24, 2020 for a period of one year as part of a Covid relief plan leading to a sharp drop in new cases of insolvency with only 161 cases admitted in the first half of the year. The government had also raised the default threshold for opening insolvency from Rs 1 lakh to Rs 1 crore to prevent small businesses from having to go through insolvency proceedings.
“The recovery of the stock market and the recovery of the Indian economy after the government measures give creditors a lot of confidence that they will be able to attract suitors for distressed assets. The scenario was uncertain in September 2020 and creditors were unsure of finding a solution to the stressed cases, ”said Rajiv Chandak, partner of Deloitte India. The government initially suspended the insolvency opening for six months from March 25, but extended the suspension for three months each in September and December 2020.
Chandak noted that banks prefer the IBC as a resolution mechanism over loan restructuring because the process provides a clean slate for a debtor company.
“A limited number of companies have emerged from the stress with a simple financial restructuring of the balance sheet by extending interest and principal payments,” Chandak said, noting that the Corporate Insolvency Resolution (CIRP) process in The IBC framework provides a fresh start by solving financial, operational and government dues issues, resulting in better recoveries for stakeholders.
Experts also noted that public sector banks in particular preferred the IBC as it is a binding, market-based mechanism, as they feared restructuring decisions accepting haircuts may be subject to further review. by government agencies.
Manoj Kumar, partner at the Corporate Professionals law firm, said raising the rupee 1 crore threshold would likely give small businesses more time before their defaults reach the threshold at which the government could introduce a regime. ‘pre-pack insolvency for MSMEs.
“Most MSMEs have small loans and payments on a quarterly basis and it may take them two to three quarters to reach the threshold,” Kumar said, noting that this could be the reason the government chose to lift the suspension in the absence of a special insolvency framework for MSMEs. The government is set to introduce provisions to introduce a pre-pack under the IBC, in which creditors could seek a faster resolution by agreeing to a resolution plan before going to court. A large part of the mechanism that would allow the debtor to retain control is to give developers the flexibility to restructure their liabilities.
Chandak, cited above, also noted that the introduction of pre-packages would allow faster resolution of insolvency and help reduce the workload of national company law courts.
Misha, a partner at law firm Shardul Amarchand Mangaldas & Co., said banks would be cautious about insolvency after the suspension ends, given the unfavorable economic conditions.
“I think banks are pretty cautious about using IBC and won’t rush to launch CIRP on first default after the suspension is lifted. Operational creditors can, however, use the IBC as a leverage on debtors.