‘IBC resumption to lead to uptick in cases, pre-packs need of the hour’

Chandak noted that the banks prefer IBC as a resolution mechanism over loan restructuring as the process provides a corporate debtor with a clean slate.

“Limited number of companies have come out of stress with mere financial restructuring of balance sheet by prolonging interest and principal payments,” said Chandak noting that the Corporate Insolvency Resolution Process (CIRP) under the IBC provides a fresh start by resolving financial, operational and government dues, resulting in better recoveries for stakeholders.

Experts also noted that public sector banks in particular preferred IBC as it is a binding market-based mechanism because they were wary of restructuring decisions accepting haircuts being subjected to susbequent scrutiny by government agencies.

Manoj Kumar, partner at law firm Corporate Professionals said that the increased threshold of Rs 1 crore would likely give smaller firms more time before their defaults reach the threshold level by which time the government may introduce a pre-pack insolvency scheme for MSMEs.

“Most MSMEs have small-sized loans and payouts on a quarterly basis and it may take two-three quarters for them to hit the threshold,” said Kumar noting that this could be why the government chose to lift the suspension in the absence of a special insolvency framework for MSME. The government is set to introduce provisions to introduce pre-pack under the IBC in which creditors would be able to seek faster resolution by agreeing to a resolution plan before approaching the courts. The mechanism which would allow the debtor to remain in control is largely aimed at providing promoters an opportunity to restructure their liabilities.

Chandak, quoted above also noted that the introduction of pre-packs would allow quicker insolvency resolution as well help reduce the case burden on National Company Law Tribunals.

Misha, partner at law firm Shardul Amarchand Mangaldas & Co. said that banks would be prudent about initiating insolvency post the end of the suspension taking into account adverse economic conditions.

“I think banks are quite prudent about using IBC and will not rush to initiate CIRP at the first default post lifting of the suspension. Operational creditors may however use IBC as a way to exert pressure on debtors.“