What are pre-packs under IBC?

EDITOR: The pause in bankruptcy resolutions because of the covid-19 pandemic has prompted the government to legislate changes to the insolvency code to fast-track processing of cases where a restructuring plan has been agreed in advance between the company and its creditors, two people aware of th development said.The so-called pre-packaged insolvency procedure, or pre-pack, will also help ease the burden on bankruptcy courts, once the changes to the Insolvency and Bankruptcy Code are approved by Parliament.

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

WHAT IS INSOLVENCY AND BANKRUPTCY?

Insolvency is when individuals or companies are unable to repay their outstanding debt. Bankruptcy is when a court has declared a person or otherentity insolvent, having passed appropriate orders to resolve it and protect the rights of thec creditors It is a legal declaration of one’s inability to pay off debts.

INSOLVENCY AND BANKRUPTCY CODE

• Enacted in 2016, it applies to companies and individuals.

• As of 2015, insolvency resolution in India took 4.3 years on an average.

• Thus enacted to streamline and speed up the resolution process of failed businesses.

• The Code consolidates provisions of previous legislative framework to form a common forum for debtors and creditors of all classes to resolve insolvency.

The code stipulates that the resolution process of a stressed company will have to be completed in a maximum of 270 days.

INSTITUTIONS TO FACILITATE RESOLUTION OF INSOLVENCY

• Insolvency Professionals

• Insolvency Professional Agencies

• Information Utilities

• Adjudicating authorities

• Insolvency and Bankruptcy Board

CURRENT ISSUES

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,With 738 of 2,170 ongoing insolvency resolution processes having already taken more than 270 days at the end of March.

SO, WHAT IS A PRE-PACK?

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.The process needs to be completed within 90 days so that all stakeholders retain faith in the system.

BENEFITS

• Faster resolution than the traditional CIRP.

• Lower the burden on the NCLTs.

• The incumbent management retains control of the company until a final agreement is reached.

• The distressed company can continue to operate during the period.

DRAWBACKS OF PRE-PACK?

The key drawback 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.Experts said 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.Also, unlike in the case of a full-fledged CIRP which allows for price discovery,In the case of a pre-pack the NCLT would only be able to evaluate a resolution plan based on submissions by the creditors and the investor.

REMEMBER

The proposed pre-packaged resolution would likely be subject to approval by the NCLT.