Govt to introduce pre-packaged bankruptcy schemes to speed up resolution process

To make resolution of bankrupt companies easier, the Centre seeks to introduce a quick rescue option for corporate entities, which will unfold in boardrooms rather than courts.

Under these pre-packaged bankruptcy schemes, creditors and shareholders can approach a bankruptcy court with a pre-negotiated corporate reorganisation plan.

This move will help the government prevent prolonged and expensive legal battles, a senior government official told Mint.

This step will also ensure a timely resolution of bankrupt assets, which is crucial to prevent erosion in their value. This practice is prevalent in the US and the UK.

The pre-negotiation process among the shareholders has to be transparent, Corporate Affairs Secretary Injeti Srinivas said. "We have to see if we need to recognise pre-packaged bankruptcy plans in the law or it is something that we can do even now. We will ask the Insolvency and Bankruptcy Board of India (IBBI) to look into it," he added.

The IBBI is responsible for implementing India's bankruptcy regime, the Insolvency and Bankruptcy Code (IBC), which became operational in December 2016. It has solved 60 cases so far.

At present, companies or creditors have to approach a bankruptcy tribunal to determine the way forward for the defaulting company. The latter gets protection for a maximum of 270 days from recovery of dues in any way. Litigation during this period delays the resolution process in most of the big cases.

In some cases, to save viable companies from liquidation, the National Company Law Tribunal (NCLT) excludes the time lost in litigation from the 270 days available for concerned parties to agree on a rescue plan.

Under the pre-packaged scheme, the case would reach the bankruptcy court after the parties have agreed on a scheme so that it gets enforceable as soon as possible. Without the court's nod, enforcement becomes difficult, in case one of the parties backs out.

Sumant Batra, managing partner at law firm Kesar Dass B & Associates told ET that pre-packaged resolutions schemes are commonplace in developed insolvency jurisdictions and can reduce the time taken for resolution. He added they would require an amendment in the bankruptcy law.

Many bankruptcy cases have seen intense litigation as many shareholders were reluctant to give up control of their assets and potential investors were fighting a tough battle with their rivals.