Make pre-packaged resolution not scary – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-editorial/make-pre-packaged-resolution-not-scary/articleshow/94232147.cms

Synopsis

The pre-packaged insolvency resolution process (PIRP), a debtor-initiated reorganisation plan in advance with creditors on board, has reportedly not found many takers. That is unfortunate. PIRPs give MSMEs a window to rebuild themselves, leading to speedy deployment of assets trapped in failing companies, and preserves jobs.

The pre-packaged insolvency resolution process (PIRP), a debtor-initiated reorganisation plan in advance with creditors on board, has reportedly not found many takers. That is unfortunate. PIRPs give MSMEs a window to rebuild themselves, leading to speedy deployment of assets trapped in failing companies, and preserves jobs.

Disruptions in business operations are minimised when the pre-pack process is underway as promoters continue to manage and control the company, while the resolution professional (RP) monitors the resolution. Industry suggests that the Reserve Bank of India (RBI) could earmark certain MSMEs and give the banks the mandate to bring about a resolution that does not involve bankruptcy courts. But the process would be time-consuming and not cost-effective either. The decision on using this route should be left to the corporate debtor.

Easing some of the rules is a better solution. One rule requires members of the corporate debtor to pass a special resolution, or at least three-fourth of the total number of partners, to pass a resolution to initiate PIRPs. Another rule mandates unrelated financial creditors representing not less than 66% in value of debt due to them to approve the RP’s appointment.

Experience in Britain shows that pre-packs have been successful in preserving enterprise value. But Indian bankers are reticent, due to the fear of being in the crosshairs of enforcement agencies for accepting haircuts to clean their books that may be questioned later. Credit decisions require judgement of risk, and all haircuts are not mala fide. Senior management in banks must be shielded from individual accountability for decisions. Lenders, in turn, must work with debtors to ensure that PIRPs gain wider acceptance.

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