The journey of a pre-pack insolvency starts with an informal understanding, engages stakeholders, and ends with a judicial blessing of the outcome
The pre pack insolvency scheme, touted as the next stage in the evolution of the Insolvency and Bankruptcy Code (IBC) 2016, will attempt a balancing act, as lawmakers put together an informal arrangement with a debtor-in-possession and creditor-in-control model, as suggested in the draft proposal of the sub-committee of Insolvency Law Committee.
The scheme involves a step before the insolvency resolution, where creditors and the promoter agree on a plan to resolve the stressed company before admission of insolvency application. This plan can come from the promoter, if eligible under section 29A of IBC, or from a third party.
While this will be the base plan, creditors would be able to invite resolution plans to challenge it and select the best offer between promoter or investors and the one by the Swiss challenger. Each would then get a chance to better the other’s offer, depending on calculations suggested in the framework. Having studied the pre-packaged insolvency framework of different countries, India has opted for a hybrid of both informal out-of-court and formal judicial insolvency proceedings.
The purpose of this scheme is not just to have a timely and faster resolution mechanism, but also to give legal sanction to a plan agreed between banks, promoters, and the buyer. It is also expected to be lighter on courts. At a time when the suspension of corporate insolvency resolution process is about to expire and Covid-related debt needs to be resolved, the prepackaged scheme could hold many answers.
Laying the framework
The sub-committee has recommended that the corporate debtor may initiate the pre-pack, since it could prove difficult to implement if creditors were allowed to do so without the willingness of the promoter.
Unlike the corporate insolvency resolution process (CIRP), where the resolution professional takes charge of the company, the sub-committee has proposed a debtor-in-possession model for pre-packs. The resolution professional has to be appointed with the consent of a majority of unrelated financial creditors.
Experts feel this would avoid the inevitable shock to operations associated with CIRP, where the corporate debtor shifts from the current management to the interim resolution professional, then to the resolution professional, and, finally, to the successful resolution applicant.
The corporate debtor would require the consent of a simple majority of unrelated financial creditors for initiation of pre-pack. The committee of creditors (CoC), just like in CIRP, has the power to approve or reject a resolution plan. The CoC can also order liquidation with 75 per cent voting power, higher than the threshold of 66 per cent under CIRP.
The pre-pack insolvency can be initiated if there is a default in the payment of debt, especially in the context of Covid-related default, which is to get priority in the proposed framework.
A moratorium that gives a calm period just like in CIRP is also recommended for pre-packs, but with no option of extension.
Treading carefully
The IBC may make a skeletal provision enabling pre-packs, and prescribing the contours of subordinate legislation that will allow the government to introduce “many sophisticated variants of pre-pack”.
The future phases would cover a default above Rs 1 crore, followed by Rs 1 to Rs 1 lakh and then the pre-default stress that would require consent of 75 per cent of creditors to avoid misuse, the sub-committee has said. As far as claims go, the corporate debtor has to make available all information regarding outstanding, contingent, and future claims for verification by the resolution professional.
The framework says, “If the corporate debtor willfully provides any wrong information or omits to provide material information with respect to any claim, the same shall attract criminal liability”.
A pre-pack insolvency cannot be initiated within three years of closure of another pre-pack. This is like a CIRP, which cannot be initiated within 12 months of closure of another CIRP, and the two processes cannot run in parallel.
