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Government considering pre-packaged resolution for stressed firms under IBC

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The government is looking to provide a pre-packaged resolution framework for stressed companies under the Insolvency and Bankruptcy Code (IBC).

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.

“Government has set up a committee to give a pre-pack framework, we expect the report of the committee to come by the end of this month,” said MS Sahoo, chairperson of the Insolvency and Bankruptcy Board of India (IBBI).

“But if this has to be drawn under law and not by market practice, it will require an amendment in law,” Sahoo said, during a webinar on the IBC suspension, hosted by the Associated Chambers of Commerce and Industry of India (ASSOCHAM) on Friday.

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.

Sahoo likened the decision to a ‘keyhole surgery’. “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,” he said.

The failure to liquidate an unviable firm was a mistake that could be rectified in the future but the mistake of liquidating a viable firm cannot be undone, he said. “Rescuing a viable firm is far more important than failing to liquidate an unviable firm during the current times.”

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.”

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