Pre-packaged IBC deals expected in a month: IBBI Chief MS Sahoo

As the landmark Insolvency and Bankruptcy Code (IBC) has come a long way since its inception in the past three-and-a-half years, the Chairman of the Insolvency and Bankruptcy Board of India (IBBI), M.S. Sahoo feels that the country and the IBC regime is yet to reach a phase where corporate debtors would voluntarily come up for resolution of debt or exit from the business with a sense of celebration rather than despair.

Sahoo noted that, “The day an Indian entrepreneur says ‘I have tried and failed, now I want to walk away and try something else’, it will be the real success of IBC. That is the real objective of the law, we are working for that,” he added. The IBBI chief noted that the insolvency regime is on its way to achieve such a level of ease in voluntary exit of businesses.

He was of the view that such thought process among the business fraternity and entrepreneurs of the country will be achieved in the next three to five years. He noted that such proceedings would be initiated under Section 10 of the IBC, which already exists, and corporate debtors file for resolution themselves under the section, but the psychological change of exiting a business with a sense of ‘celebration’ is yet to be achieved.

A pre-packaged insolvency (a pre-pack) is one such novel resolution mechanism which is a pre-planned process in which a financially distressed company and its creditors reach an agreement with a buyer for its sale prior to initiating insolvency proceedings. This process has been used extensively in the United States and the United Kingdom since the 1980s.

The advantages of pre-packs are that they avoid lengthy negotiations with creditors after the commencement of insolvency proceedings, thereby enabling expeditious insolvency resolution with minimal involvement of courts and tribunals. Moreover, pre-packs allow pre-emptive resolution of distress as they can be arranged even before formal defaults have occurred.

The committee looking at the prospects and the framework for pre-packaged restructuring deals under the Insolvency and Bankruptcy Code (IBC) is expected to come up with its report in a month’s time, said M.S. Sahoo, Chairman, Insolvency and Bankruptcy Board of India (IBBI).

Sahoo said that pre-packaged or pre-pack is an alternative mechanism which is under consideration and is being prepared.

He said that if the pre-pack framework comes into force, the resolution or the restructuring plan between the company and the lenders would be framed and prepared beforehand, which would have to be approved by the National Company Law Tribunals (NCLT).

Experts are of the view that the pre-packaged insolvency framework will help in easing the burden on the NCLT and the National Company Law Appellate Tribunal (NCLAT). Already there is a huge backlog of cases at the NCLT benches and most of the CIRP cases have been delayed.

On the special resolution framework for micro, small and medium enterprises (MSME) announced in May, Sahoo said that the framework is under works and is in advance stage. The announcement to come up with a special resolution framework for MSMEs under the IBC was made by Finance Minister Nirmala Sitharaman as the sector has been among the worst hit during the Covid-19 pandemic.

On the journey of IBC since its introduction in 2016, Sahoo said that it has been a “fantastic” one given the various constraints witnessed over the years. He added, “You have to see what outcome you are getting... particularly the debtors. Today they want to come and resolve the issue before reaching the NCLT... that is the biggest change that has happened.”