Ind-Barath Energy, situated in Hyderabad, exited the Insolvency and Bankruptcy Code (IBC) procedures around six months ago with a new buyer, JSW Energy, after almost four years. The procedure should have lasted six months, or a maximum of a year if one takes into account litigation, according to the IBC's timetables. The conclusion was equally unsatisfactory, with banks only recouping Rs 1,047 crore of the thermal power producer's outstanding Rs 5,500 crore in debt. Not an exception is Ind-Barath. At the IBC, more than half of the default cases have been pending for more than nine months without being resolved. Furthermore, only a tiny portion of the admitted claims are typically recovered by the financial creditors, who are mostly banks.

With the settlement of Essar Steel and Binani Cement, where lenders had recoveries of 90–100%, the IBC did see some success in its early days. Since then, times have changed. But the length of the settlement process has always been a problem. Technically, the IBC must adhere to rigorous time frames; for example, an insolvency application must be admitted or rejected within 14 days, and claims must be submitted within 90 days. According to Rajesh Narain Gupta, Managing Partner of legal firm SNG & Partners, It is challenging how the courts can incorporate the IBC process within these timelines.

The government adopted a less complicated, pre-packaged insolvency plan two years ago, when Covid-19 had the greatest impact on MSMEs. Here, the lenders are permitted to restructure the stressed loans, unlike the court-driven IBC procedure. The approach, however, only garnered the interest of four businesses, thus it wasn't widely adopted. "The design of the pre-packs is quite complicated, involving various procedural steps as well as the involvement of the NCLT [National Company Law Tribunal]," explains Misha, Partner at Shardul Amarchand Mangaldas & Co (SAM). It first needs the approval of 66% of lenders. Second, if a haircut occurs, it needs to be documented. This unnerves bankers.

The promoters also fear the Swiss challenge clause, which gets triggered if any resolution plan offers a haircut to operational creditors (suppliers owed money by the bankrupt party). “The pre-pack model is convoluted, as it requires the operational creditors to receive the full value to proceed without going through a bidding process,” says Aashit Shah, Partner at law firm JSA.

Under the Swiss challenge mechanism, there is an open bidding process. “Fear of losing control may delay early recognition of stress and the initiation of pre-pack by promoters,” says Bhrugesh Amin, Partner at BDO Restructuring Advisory LLP.

Experts suggest the solution lies in strengthening the decision-making abilities of bankers. SAM’s Misha says it would help if there is the “concept of rating agencies or an independent committee of external experts to endorse the commercial viability of pre-pack resolution plans”.

According to Gupta of Sarthak, the government—possibly the banking regulator Reserve Bank of India—could reassure bankers that no one would challenge their business judgement if a reorganisation is within the bounds of commerce and is commercially justified. That's a big ask

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