Govt explores pre-packaged bankruptcy plan to fast track insolvency process

The pre-packaged bankruptcy proposal aims to cut cost and time of resolution process

The feasibility of implementing a ‘pre-packaged’ bankruptcy scheme, prevalent in the US, is under consideration, it is learnt. The move is meant to strengthen the insolvency framework, while cutting the cost and time of the resolution process, according to officials in the Ministry of Corporate Affairs.

Under the pre-packaged scheme, a company in financial distress will be able to chalk out a resolution plan prior to moving the National Company Law Tribunal (NCLT). 

“The scheme will typically allow a stressed company to prepare a financial reorganisation plan with the approval of at least two-thirds of the creditors before filing of an insolvency application by any party at the NCLT,” an official said. The resolution plan, prepared by debtors and creditors, will then be placed before the NCLT for approval. This will be done by amending the Insolvency and Bankruptcy Act. 

Government officials argue that since the plan is already endorsed by lenders, it will effectively bypass various requirements and interventions by the NCLT at different stages under the IBC process. This is likely to help reduce the litigation cost and delays. 

The concept gained currency within the government after the insolvency process started getting caught in rounds of litigation. Usually, it takes about a month for the NCLT to either admit or reject a case after it is filed, with  interventions by various parties coming in the way. 

At present, the debtor company, its financial creditors or the operational creditors can move the NCLT to initiate insolvency proceedings and find a resolution and way to repay loans. The insolvency and bankruptcy code was brought into effect in 2016 to find a solution to bad loans. 

According to the code, a company has up to 270 days to finalise a resolution plan failing which its assets will be liquidated. Also, the promoter of a company cannot bid to get back the company. The government inserted a new clause as Section 20 (A) prohibiting anyone related to the company from placing a bid. 

A resolution professional appointed by the NCLT oversees the functioning of the company and invites resolution plans which are then put up for the tribunal’s approval. 

The government had earlier indicated that once the initial clutter of the IBC is cleared, a pre-IBC framework could be considered to sort out the non-performing assets issue.

For speedy resolution

• Move seeks to aid the existing insolvency framework, reduce litigation

• Will effectively bypass various requirements and interventions by NCLT at different stages

• Will need approval of at least two-thirds of creditors before filing an insolvency application

• The new regime could be a mix of pre-IBC and IBC mechanisms