Large Companies May Also Get Pre-pack Scheme Under IBC
The government is planning to create an enabling provision for a compact, which is primarily an informal bankruptcy settlement process designed for faster resolution of large firms under the Insolvency and Bankruptcy Code (IBC), akin to the one available for micro, small, and medium Enterprises (MSMEs), according to individuals familiar with the matter.
The corporate affairs ministry is expected to introduce a similar "creditor-led resolution" mechanism or include the provision to extend the pre-packaged insolvency framework to large firms, following recent amendments in the IBC, but only when it deems the time is right, said a person with knowledge, speaking on condition of anonymity.
Another source familiar with the development mentioned that the Prime Minister's Office (PMO) will determine the timing of amendments. No Bills of this nature have been listed for the ongoing Parliament session.
An enabling provision in the next round of planned amendments to the IBC may empower the government to implement such a scheme at the appropriate time in the future without requiring Parliamentary approval again.
The industry has been urging the government to establish such a framework for larger firms as well.
Under the existing pre-pack scheme for debtors, creditors, and MSMEs can first reach an informal agreement on resolution before approaching the National Company Law Tribunal (NCLT) to admit and resolve bankruptcy cases.
The individual familiar with the matter stated that the IBC amendments are in preparation, and the government could establish an enabling provision to notify such a framework for big companies at an appropriate time in the future, if not immediately.
Experts suggest that the pre-pack scheme has not been successful for MSMEs but may be suitable for larger companies.
This initiative comes as 67 per cent of insolvency cases, undergoing the resolution process until September 2023, exceeded the mandated 270-day time period for resolution under the IBC, according to data from the insolvency regulator. Prolonged delays further diminish impaired assets, resulting in substantial haircuts for creditors.
The existing pre-pack scheme for MSMEs allows only the debtor to trigger its bankruptcy process, subject to the approval of financial creditors holding at least 66% of voting power. Resolution plans must be submitted within 90 days, and the NCLT has an additional 30 days to approve them.
Experts noted that the current pre-pack scheme for MSMEs has not delivered satisfactory results since its implementation in April 2021, with only a handful of cases admitted under it so far. A senior public sector banker mentioned that bankers fear case admission through a mostly informal process or decisions on voluntary haircuts could trigger potential investigations in the future, even in genuine cases.
