The path to a fast resolution

‘Pre-packs’ have become the most talked about proposed reform in the insolvency laws regime in India in the recent past. The mainstream insolvency resolution process under the Insolvency and Bankruptcy Code, 2016 (IBC) has been marred with delays primarily on account of litigation and is also seen as a bit cost-heavy, given the public nature of the process.

Further, the non-cooperation of the promoter-management and information asymmetry in the hands of the creditors, insolvency professionals, and third-party bidders is another significant challenge to successfully run an insolvency resolution process. To add to all this, the long-drawn Covid-19 pandemic and its ill-effects on the economy has compelled everyone to look for an alternate solution, which is faster, more cost-efficient, and leads to quicker turnaround of viable businesses.

It is in this context that pre-packs are seen as an attractive solution. Essentially, pre-packs refer to processes where a sale/turnaround solution is finalised prior to initiation of a formal insolvency process and it is formally approved soon after the initiation of a formal process. The key advantages of a pre-pack process are time and cost efficiency; continuity of the business without adversely affecting value on account of insolvency action; and potentially less litigation. In jurisdictions such as the U.K., the administrator has wide discretion to allow such pre-pack solutions to go through. A similar process is being proposed to be introduced in the Indian context as well.

Pre-packs can be an attractive alternative to the insolvency resolution process in cases where it has the cooperation of the existing management along with a broad consensus on approach amongst the lender body. In such a situation, a sale/turnaround solution can be arrived at mutually between the corporate debtor and lenders quickly, and this can be presented for approval as a resolution plan under the IBC. This would have the attendant advantages of statutory approval of a judicial body, its binding effect on all stakeholders, and a clean slate for the corporate debtor in its new avatar—advantages which are not available in purely out-of-court restructurings.

The biggest challenge in evolving such a process is the fact that the pre-packs generally do not conform to an open public bidding process. Open public bidding lends credibility to an insolvency resolution process both from the process sanctity perspective as well as for value maximisation and thus, justifies cramming non-participating as well as dissenting stakeholders under the IBC.

Since a public-marketing exercise, collection of claims and then appointment of a committee of creditors is the sine qua non of the insolvency resolution process under the IBC, pre-packs cannot be introduced by way of delegated legislation in the scheme of the IBC, without amending the code itself and providing for a special chapter for pre-packs in the statute itself.

Possibly, a special process of pre-packs can be statutorily provided where the corporate debtor and/or the creditors are permitted to present the pre-pack solution in the form of a resolution plan to the National Company Law Tribunal (NCLT). This solution can be arrived at by engaging an insolvency professional who may carry out a limited marketing exercise as agreeable to the corporate debtor and the lenders based on the record of claims and liabilities maintained by the corporate debtor and information utilities. The NCLT can then appoint an insolvency professional to invite claims; carry out valuation to arrive at the liquidation and fair value of the corporate debtor; and confirm the compliance of the presented resolution plan to the parameters prescribed under the IBC, including its approval by requisite majority of the financial creditors, who would have formed the committee of creditors under the insolvency resolution process. Upon being satisfied of such compliances, the NCLT can proceed to approve it as a resolution plan, in a similar manner as currently under the IBC. This entire process can be completed within two-three months to preserve the efficiency of pre-packs.

Given that pre-packs require the cooperation of the existing management, the contours of Section 29A ineligibility may need to be diluted to oust only wilful defaulters. Given this dilution and absence of public bidding process, the threshold for approval by the financial creditors, may also be raised to 75%, to avoid pre-packs being used to defeat the scheme and intent of the insolvency resolution process under the IBC.

Views are personal. The author is partner, Shardul Amarchand Mangaldas & Co.