The recent news spotlight has been on the sub-committee of the Insolvency Law Committee (ILC), which has suggested implementing a Pre-Pack Insolvency Resolution Process (PPIRP) within the existing Insolvency and Bankruptcy Code (IBC), 2016. Dr. M. S. Sahoo, Chairperson of the Insolvency and Bankruptcy Board of India (IBBI), led the committee, which the Government established in June 2020 to deliberate on PPIRP.
Understanding Pre-Packs
Pre-Packs are essentially agreements for the resolution of debt for a struggling company through an agreement between secured creditors and investors. This is done without resorting to a competitive bidding process. This insolvency resolution mechanism has been gaining popularity in the UK and Europe over the last ten years. For India to adopt such a system, financial creditors would need to agree on terms with prospective investors and attain approval of the resolution plan from the National Company Law Tribunal (NCLT).
The Need for Pre-Packs
The Corporate Insolvency Resolution Process (CIRP), under the IBC, has been criticized for its slow progress of resolving financially distressed companies. Stakeholders under the IBC are expected to complete the CIRP within 330 days from the initiation of insolvency proceedings.
Key Features of Pre-Packs
A defining characteristic of Pre-packs is the need for an insolvency practitioner’s services to guide stakeholders through the process. The sway of authority that the practitioner holds varies on a jurisdictional basis. Pre-pack processes usually do not require court approval. If it does call for approval, courts are generally guided by the parties’ commercial wisdom. The pre-pack process outcome, once approved by the court, is obligatory for all involved parties.
Pre-pack Offers Advantages
Pre-packs offer several benefits, including quick resolution, minimization of business disruptions, group resolution, and is considerably lighter on courts. It enables a rapid resolution while preserving and maximizing the value of a company in distress – which boosts the likelihood for resolution.
Potential Drawbacks of Pre-Packs
The primary disadvantage of a pre-packaged insolvency resolution is the reduced transparency compared to the CIRP. This is because financial creditors agree privately with potential investors rather than through an open bidding process. This could prompt stakeholders such as operational creditors to question fair treatment when financial creditors make arrangements to lessen the distressed company’s liabilities.
Looking Ahead
In the prevailing IBC regime, insolvency professionals are still developing the necessary expertise over time. Like the progression of laws under the UK, applying pre-pack insolvency in India will necessitate a significantly higher level of expertise from insolvency professionals due to the increased degree of control associated with such resolution methods. However, given the rising trend of out-of-court settlements, pre-pack insolvency could very well emerge as the next alternative to standard CIRP proceedings.
