Given the Covid context, the ‘pre-pack’ option should be finalised
The Covid impact poses fresh challenges to the recently-restarted IBC process which has been weighed down by delays in the past. The challenge here is two-fold: dealing with the likely spike in the number of such cases referred to the NCLT; and overcoming the limitations of the existing set-up, which appears to have been biased in favour of liquidating the asset and realising a decent value rather than reviving it, even in pre-Covid times. Data from the September 2020 newsletter of the Insolvency and Bankruptcy Board of India show that IBC resolutions have yielded only slightly more revivals than liquidations ( after netting out the BIFR backlog). Stressed assets need a fair shot at revival at a time when economic activity is in the doldrums and there are few investors waiting in the wings. To ward off a ballooning of IBC cases, a restructuring plan should be set into motion at the first sign of default, and resolved much faster than the present time-frame of 180 or 270 days. The IBC process is demonstrated to have worked well for entities where the intrinsic value of the asset is high and tangible (such as steel) – less so for service entities and medium-sized concerns where valuations can pose challenges. The latter cannot easily attract strategic and financial investors today. Hence, the panel set up by the Ministry of Corporate Affairs to revisit the insolvency issue has implicitly raised the question of whether the inherent bias against existing promoters, under Section 29 (a) of the Code, is appropriate for these times.
As for rising large NPAs, the proposed asset reconstruction company (ARC) is expected to deal with these cases. These are not the best of times for ARC takeover of assets, or for one-time settlements, unless the creditors take steep haircuts and borrowers accept high interest rates. The promise of ‘pre-pack’ cannot be overemphasised.