Centre weighs allowing group insolvencies

The idea was mooted by the Centre earlier to stake-holders. Other business chambers have also supported the move as they feel there would be quicker resolution to insolvency problems.

Published: 13th June 2019 10:27 AM  |   Last Updated: 13th June 2019 10:27 AM   |  A+A-

Union Defence Minister Nirmala Sitharaman

Minister of Finance and Corporate Affairs Nirmala Sitharaman (File Photo | PTI)

Express News Service

NEW DELHI: The government is considering allowing group insolvencies, a concept where instead of lenders taking each subsidiary separately for bankruptcy, the entire group would be taken for insolvency resolution.

“We have been mulling this for some time and in the final draft we are likely to incorporate this as both lenders and many industry bodies are in agreement that this will be the best solution,” said senior officials in the Ministry of Corporate Affairs.

The idea was mooted by the Centre earlier to stake-holders. Other business chambers have also supported the move as they feel there would be quicker resolution to insolvency problems.Said former SBI Managing Director Sanjay Bhattacharyya, “The thinking is based on the principle that a group has to answer for the bankruptcy of a subsidiary. Some parts of an Octopus cannot be healthy and others sick. However, we have to also understand that each company is a separate entity and often a subsidiary’s troubles do not reflect on the whole group.”

The recent crisis in  IL&FS. where now it has been discovered that all its subsidiaries were in trouble despite the high credit rating that the group as a whole and subsidiaries individually enjoyed. seems to have provoked the government to consider bringing in this provision.

Officials said that they hoped to create a framework through amendments to the IBC Act which will let multiple entities of a group facing near bankruptcy issues to be clubbed together before a single tribunal for a quicker resolution.

“Read together with another formulation which we have suggested – of pre-packaged insolvency this could really speed up things,” they said.  

A pre-packaged insolvency is a procedure where a bankruptcy restructuring is agreed in advance of accompany being declared insolvent by the lenders and the company in question.The package is then brought before the Insolvency board and as it has already been agreed to is passed quickly. Both the United States and United Kingdom have provisions for ‘pre-pack’.

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