First, the government should try to reduce reliance on formal procedures under the IBC (Insolvency and Bankruptcy Code). One way to do this would be to encourage recourse to ‘out-of-court  restructuring’ mechanisms. For that, the government should consider making legislative amendments to extend similar benefits and to distressed asset investments as those extended to in-IBC investments, as has been done recently by the Securities Exchange Board of India.

Another way to achieve this would be to introduce hybrid procedures such as ‘pre-packs’. The government is already considering a proposal for the same. The government should consider granting ‘flexibility’ to stakeholders, not ‘overscripting’ what procedures need to be followed for pre-packs and allowing non-malfeasant promoters to present plans for the insolvency resolution of companies. We believe this pre-pack should also serve as a blueprint for the long-awaited specialised MSME insolvency framework.

Secondly, the government should take steps to resolve the perennial issue of delays in insolvency (both in and outside IBC). While adherence to timelines in IBC presents a remarkable improvement over previous insolvency resolution mechanisms, long delays, particularly on account of litigation and government actions, have eroded confidence in the IBC. To reduce  unnecessary applications before the tribunals and save judicial time, legislative amendments should be made to provide for issues such as those arising in group insolvency and cross-border insolvency, which are currently not dealt with comprehensively in the Code.

On the other hand, to reduce the time taken for disposal of litigation, the government should make budgetary allocations to improve the e-tools, infrastructure and research support and make changes to increase bench strength for the relevant tribunals.

Thirdly, the government should consider extending tax incentives for distressed asset deals. For instance, it may be beneficial to exempt transfers of assets by distressed companies (both within and outside the IBC) from the levy of capital gains tax. This would be especially beneficial where assets transferred consist of shares and immovable property, given that sections 50CA and 50C of the Income Tax Act 1961 (“IT Act”) deem the fair market value of such assets to be the full value of the consideration (irrespective of the actual consideration received) for purposes of computing capital gains tax.

Finally, a modern insolvency resolution mechanism for financial service providers such as banks (such as that proposed in the Financial Resolution and Deposit Insurance Bill, 2017) should be expedited so that distress in the financial sector, which has been rising, can be dealt more consistently and in a manner that minimises depositor hardship and systemic risk.

This article was originally published in Business World on 28 January 2021 Co-written by: Misha, Partner; Shreya Prakash, Associate. Click here for original article

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