Pre-Packaged Insolvency in India

As per the reports, a pre-packaged insolvency or a pre-pack is a pre-planned process in which a financially distressed company and its creditors tries to reach an agreement with a buyer for its sale prior to initiating insolvency proceedings. This is done by an insolvency practitioner or an Insolvency Resolution Professional (IRP) who is appointed as the administrator/ bankruptcy trustee of such company. The sale takes place on the date of initiation of insolvency proceedings or the appointment of administrator/ insolvency professional, and then the sale proceeds are distributed amongst stakeholders in the order of priority.

Pre-packs helps to avoid lengthy negotiations with creditors of the company after the commencement of insolvency proceedings, enabling insolvency resolution in an expeditious manner with minimal or zero involvement of courts and tribunals. Pre-pack would not only reduce the time taken for insolvency resolution and will permit greater value maximization, but will also substantially reduce the burden on the tribunals. The challenge is to co-join the pre-pack mechanism with the existing insolvency resolution mechanism under the Code, so that necessary statutory compliances and safeguards for ensuring transparency and protection of stakeholders are not left behind. A suitable set of Regulations will be introduced for this purpose. Few guidelines relating to Pre-Pack mechanism are as follows:

1. The corporate debtor or financial creditor(s) holding a certain percentage of debt (upon the occurrence of a formal default) should be able to appoint an insolvency resolution professional to carry on the pre-pack mechanism.
2. The IP then, constitutes a Committee of Creditors (CoC) of the corporate debtor based on information available with the corporate debtor.
3. Then IP then invites bids, carries out adequate marketing and limited disclosure to avoid reputational risks and loss of employment or customer confidence.
4. An independent valuation exercise of the corporate debtor should also be carried on by the IP.
5. Once a resolution plan is negotiated between the CoC and potential buyers, this plan should be approved by at least two-thirds of the Committee of Creditors.
6. The IP should subsequently file the resolution plan for the NCLT’s approval within a specified period of time.
7. A detailed statement of disclosure should be also filed along with the resolution plan. It should provide details on the independent valuation, the marketing efforts, the rationale for using the pre-pack mechanisms and the alternatives considered, and the interests of all stakeholders been considered.

Since, the resolution plan has the prior approval of the CoCs, there should be no need for NCLT to intervene at various stages during the Insolvency Resolution Process. Once the resolution plan is filed before the NCLT, a moratorium under the I&B Code may be imposed. During this period, claims and objections to the resolution plan should be invited from all creditors of the corporate debtor. This would ensure that operational creditors and other creditors who were not involved at the pre-filing stage gets an opportunity to present their objections, if any.

After duly hearing such objections and ensuring proper compliance with statutory requirements, the NCLT should approve the resolution plan. Pre-pack mechanism, if implemented well, will help in promoting early debt restructuring in a manner that best achieves the objectives of the Code.

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