According to the Insolvency and Bankruptcy Code (IBC), the central government is focusing to provide a pre-packaged resolution structure for stressed companies. In a pre-packaged resolution, where a company prepares a restructuring plan in cooperation with its creditors before initiating insolvency proceedings, reduces the time and costs involved in the process.
MS Sahoo, chairperson of the Insolvency and Bankruptcy Board of India (IBBI) said that Government has set up a committee to give a pre-pack framework, he expects the report of the committee to come by the end of this month. He added that, if this has to be drawn under the law and not by market practice, then it will require an amendment in the law. In June, the government promulgated an ordinance suspending sections 7, 9 and 10 of the IBC, barring initiation of insolvency proceedings for defaults occurring from March 25. The six-month suspension, ending next month, may be extended to a year, as per the ordinance.
Most firms which were viable until recently are reeling under stress today. If all such firms were to undergo insolvency proceedings, many of them would end in liquidation for want of plans to rescue them. The failure to liquidate an unviable firm was a mistake that could be rectified in the future but the mistake of liquidating a growing firm cannot be undone. During the current situation of the pandemic, rescuing a viable firm is far more important than failing to liquidate an unviable firm.
The closure of a company in this present situation would mean a loss of livelihood for many because the law has to be firmly based on the realities of the market. Garg said that extreme position in policy shift is not appropriate; banks have become risk-averse as a result of access to the IBC being denied. He also said that the entrepreneurs were forced to sell their businesses outside the IBC for fewer amounts since there was no auction-driven model.
Many experts have questioned the decision to suspend section 10 of the IBC, which enables a corporate applicant to initiate insolvency resolution. According to Sahoo, carving out section 10 from the suspension would disturb the balance the IBC has maintained between the corporate debtor and the creditors. If you tie the hands of creditors and say debtors can initiate, this will go against the basic principle of the law which is to balance the rights of these two sets of people. That balance cannot be distorted.
