Pre-Packaged Deals In Insolvency And Bankruptcy Code


  • The Ministry of Corporate Affairs (MCA) has set up a committee to look into the possibility of including what are called “pre-packs” to offer faster insolvency resolution under the Insolvency and Bankruptcy Code (IBC).

Background

  • Since the start of the year 2019, the Government has been planning to introduce the concept of Pre-Package Insolvency Schemes in the Indian Insolvency & Bankruptcy Code (IBC).
  • Now due to COVID-19, the businesses all over the country are worst hit since the global economic slowdown of 2008-2009 and it is imperative that the Government would chalk out a more concrete plan for the implementation of this system.

Need

  • Slow progress in the resolution of distressed companies has been one of the key issues raised by creditors regarding the Corporate Insolvency Resolution Process (CIRP) under the IBC.
  • Under the IBC, stakeholders are required to complete the CIRP within 330 days of the initiation of insolvency proceedings.

About ‘Pre-Packs’

It is an agreement for the resolution of the debt of a distressed company through an agreement between secured creditors and investors instead of a public bidding process.

A pre-pack process is carried out by the debtors who try to keep their entity afloat and try to negotiate with the creditors for a resolution of the debt. Therefore, if such a process fails, it can always lead to a creditor filing an application under Section 7 or 9 of the IBC and triggering insolvency.

The objectives are -

  • To obtain a better return to creditors than would be possible if the company were to be sold through an insolvency process (through the preservation of value that could otherwise be eroded because of a formal insolvency process);
  • To reduce professional costs associated with an insolvency process by streamlining the process;
  • To provide certainty of outcome to stakeholders (including creditors and the purchaser).
  • These objectives are aligned to the objectives of the corporate insolvency resolution process (CIRP).

Benefits

  • Retaining Business in the Hands of Existing Management: It can incentivise the existing management and promoters of the company to initiate the pre-pack proceedings before the occurrence of a default or at an earlier stage of default. It can help the business to retain its current management and would be agreed by the creditors as they generally agree to hold on to the existing management.
  • Better Return: In most cases it would provide a better return to the creditors. In a pre-pack scheme, the value would be determined beforehand which would yield better returns to the creditors.
  • Speedy & Cheaper Resolution: Pre-packs are usually a cheaper and less time-consuming method than the proper insolvency and bankruptcy proceedings. It reduces the legal cost involved in the formal procedure and also the insolvency professional cost.
  • Certainty of Outcomes: There is a surety of the outcome since the resolution plan has been discussed and finalized beforehand.This gives a lot of confidence to the creditors since they are assured of their money and helps put more faith in the Corporation Insolvency Resolution Process (CIRP).
  • Reducing Burden: If implemented in India, the pre-pack schemes will reduce the already burdened NCLT’s as already there will exist a resolution plan.

Issues with Pre-pack

  • Reduced Transparency:The key issue of a pre-packaged insolvency resolution is the reduced transparency compared to the CIRP as financial creditors would reach an agreement with a potential investor privately and not through an open bidding process. This could lead to stakeholders such as operational creditors raising issues of fair treatment when financial creditors reach agreements to reduce the liabilities of the distressed company.
  • No Shield of Moratorium: Another major concern that may arise during the pre-pack scheme implementation is that it would not have the shield of moratorium like it is there when a case is admitted under Section 7 or 9 of IBC.
  • Biased towards Secured Creditors:One major criticism of pre-pack schemes is that it is more in the favour of secured creditors and neither do the operational creditors have much say in the negotiation nor they are given a fair share. This challenge has to be overcome if pre-pack schemes are to be implemented in India.

Way Forward

  • With the current Pandemic creating havoc in almost every industry, it is almost certain that a lot of companies would be pushed into insolvency in the coming times and there this scheme of pre-packaged deals, if introduced, may act as a catalyst in helping those companies survive.
  • It is expected and emphasized that if the pre-pack system is implemented well, it would lead to smoother implementation of resolution plans, would promote growth and keep the company as a going concern while retaining jobs and ensuring creditors receive the funds due to them.
  • Especially during these difficult financial times, it is imperative that such a system would only yield fruitful results and would have more pros than cons.

Source : Civil Services Chronicle Online, July, 2020