In a major change to the Insolvency and Bankruptcy Code (IBC), the government will examine suggestions for shareholders of large defaulters to retain control of businesses while exploring new investments and corporate restructuring with their lenders outside bankruptcy tribunals.
A person familiar with the discussions in the government said the corporate affairs ministry’s insolvency law committee, comprising officials and independent experts, would examine the proposal in detail.
If accepted, this would be a major change from the current practice of shareholders of defaulting companies handing over management control to an administrator appointed by a committee of creditors. The proposal to let the existing management retain control after the admission of the bankruptcy petition is contrary to the creditors’ original IBC structure. The fear of losing control of their companies has encouraged many defaulters to settle their disputes with creditors and avoid bankruptcy proceedings. However, some experts argue that the tribunal-led process was not flexible enough to effectively devise a rescue plan for lenders and shareholders and save the company before it fails its operations and loses regulatory permits.
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Earlier, the government had experimented with the debtor-in-control facility under the IBC in a ‘pre-packaged’ scheme, a bankruptcy resolution template designed for smaller firms. Yet, this did not take off in a big way as small businesses explored loan restructuring under other schemes. The idea is now to introduce this format to larger firms as experts have said it is suitable for them.
Three meetings of the Insolvency Law Committee have already taken place and two more meetings will be held. These suggestions are being looked into,” said the person on condition of anonymity.
An email sent to the Ministry of Corporate Affairs spokesperson on Sunday seeking comment for the story remained unanswered at the time of publication.
Under a pre-packaged plan, much of the restructuring work is done informally to find new investors and make the business viable, and once a workable plan is drawn up, lenders and shareholders go to get its approval. approach the National Company Law Tribunal (NCLT). of approval, a scheme which provides a significant amount of flexibility to the parties.
While launching the Pre-Pack scheme, the government was cautious in limiting its scope to MSMEs. minimum payment default limit of 10 lakh was earmarked for initiating the pre-packaged insolvency resolution process. i.e. a small business that has not met its payment obligation 10 lakh can either initiate an insolvency resolution plan with approval from the lenders themselves, or the lenders can initiate the process. The advantage is that the existing management, who is well-versed in the operational aspects of the business, remains in control instead of a professional who may not have regional knowledge of the industry.
Experts said the proposed changes to the IBC could make it more responsive and effective. Anoop Rawat, Partner (Insolvency and Bankruptcy) said that it is a good idea to extend the features of the pre-packaged resolution plan to small businesses, as under it, one can start with a resolution plan which is at an advanced stage. Is. Bankruptcy) in the law firm Shardul Amarchand Mangaldas & Co. “Big corporations will be able to handle the process and the costs involved. The borrower’s possession framework will work well in cases where the default is due to economic reasons and not because of any wrongdoing by the management.”
In cases where the crisis is due to voidable transactions by the existing management, the control will anyway be handed over to the lenders as it is not desirable that such people continue to run the business.
The move to have a debtor-in-possession facility as a general IBC provision also indicates that the government wants an overhaul of the code to improve its outcomes rather than patchwork specific areas. It also recognizes a key element in saving a firm – the expertise and networking possessed by shareholders and management in a specific area, which may be unmatched by an independent professional. India introduced IBC in 2016, banking on resolution professionals to run distressed firms, but last year allowed entities to sign up as resolution professionals and run these businesses as it required multi-disciplinary skills. it occurs.
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