Pre-packed and Ready to Deploy

It is safe to say that the Insolvency and Bankruptcy Code, 2016 (“IBC” or “Code“) and the regime it has spawned, has effected a complete turnaround in the way insolvency and liquidation proceedings were dealt with in India. The IBC has quickly become the preferred route for creditors and debtors alike, with stakeholders lauding the efficiency of the Code. The standout factor that has contributed to the success of the Code is the strict timeline prescribed and followed during the insolvency resolution process. The process, as it stands, carves out a substantial involvement of the National Company Law Tribunal (“NCLT”) as part of the insolvency resolution. However, the report drafted by the sub-committee of the insolvency law committee (“Committee“) and shared with the public for comments by the Insolvency and Bankruptcy Bord of India (“IBBI“) on January 08, 2021 (“Report“) has stated that the Code, at the time it was drafted, anticipated sophisticated options with the maturity of the ecosystems1. By this, the Report has essentially signalled that the Code has matured enough to minimalize the participation of the State in the insolvency resolution process.

In recognition of the same, the Report posits that India is ready for the introduction of pre-packs, keeping in mind that India Inc has been rallying for a more hybrid insolvency resolution framework. In the Report’s view, pre-packs are in line with the basic driving force behind the enactment of the Code i.e. the rescue of a corporate debtor as a going concern and saving the business from being eroded. In attempting to understand the pre-pack and crafting a framework for the Indian market, the Report has traversed several global jurisdictions, including the United Kingdom (UK), the United States (US), France, Singapore and Canada. At the crux, however, lies the nodal question. What, after all, is the crisply termed ‘pre-pack’? To put it in the simplest terms, a pre-pack is another method of selling the business of an insolvent entity, with such sale being negotiated prior to the commencement of a formal insolvency process.

In the UK, the pre-pack has evolved out of market practice and was not enshrined in the Insolvency Act, 1986. However, due to this lack of regulation, concerns sprung up about the transparency which were sought to be addressed by the emergence of the Statement of Insolvency Practice 16 (“SIP 16“). The overall tenor of the SIP 16 is that practitioners contemplating the use of a pre-pack should be in a position to justify, and to deliver a comprehensive justification of the use of strategy to all concerned. What becomes apparent is that the UK has steadily come to regulate the usage of pre-packs even while advocating a ‘light tough’ approach with respect to the same. Similar to the UK, the US facilitates 3 (three) forms of ‘pre-plan sales’, allowing a bankruptcy trustee to sell all or substantial assets of a debtor once it enters reorganisation proceedings. It requires the debtor or trustee to give notice to every interested party to provide them an opportunity to object to the proposed transaction and also obtain the approval of the bankruptcy court to ensure that such sales are made ‘free and clear’ of any interests in such assets2.

Pursuant to an analysis of the implementation of pre-packs in other jurisdictions, the Report was of the view that the design philosophy behind pre-packs in India should be guided by devising the most optimal semi-formal option and framework must necessarily work within the basic structure of the Code and pursue the same objectives enunciated therein. It should not impair rights of any party beyond that provided in the Code and should have adequate checks and balances to prevent abuse.

The Report stated that the formal/legal part of pre-packs needs to be explicitly provided in the Code, albeit by virtue of a skeletal provision enabling pre-packs and subordinate legislation3. The Report has deliberated on several contours surrounding the pre-pack, as contained below:

Availability: The Report has recommended that the pre-pack can be made available for all corporate debtors in a phased manner;

Initiation: The Report suggests that the pre-pack ought to be initiated by the corporate debtor; and

Authorisation of Initiation: The Report has laid down that consent of a simple majority of unrelated financial creditors and shareholders of the corporate debtor would suffice for the initiation of a pre-pack.

While considering the trigger for initiation of pre-pack, the Report notes that several jurisdictions utilise pre-packs for resolution of stress prior to default. However, in its final opinion, the Report has laid down that default should be made the basis for initiation. Pertinently, it has suggested that at the first instance, the pre-pack can be used for, inter alia, default ranging from Rs. 1 lakh to Rs. 1 Crore, and COVID-19 defaults. The Report has emphasised that the corporate insolvency resolution process (CIRP) and pre-pack should not run in parallel.

The Report then goes on to examine the tasks to be completed by the corporate debtor prior to the submission of the application to the NCLT for initiation of the pre-pack. Such tasks include board meeting, general meeting, identification of resolution professional, preparation of resolution plan, etc. The Report has stressed that the law should limit itself to codifying the requirements for making an application to the NCLT and refrain from elaborating on the manner of complying with these requirements. Further, in contrast to the current insolvency regime, which shifts the corporate debtor’s operations from the corporate debtor to the interim resolution professional on its commencement, the Report recommends that under the pre-pack route, the debtor-in possession model should be followed. The Report however cautions that the corporate debtor shall still be required to take approval from the Committee of Creditors (“CoC“) on certain matters. The Report has additionally set forth the roles and responsibilities of the resolution professional and the CoC, much in the same manner as under the CIRP.

The Report, while contemplating the timelines associated with pre-packs, have stipulated 90 (ninety) days for submission of the resolution plan to the NCLT, and another 30 (thirty) days thereafter for the NCLT to either reject or accept it. The Report clarifies that if no resolution is reached within the timeline prescribed, a stakeholder may use CIRP to resolve the stress of the corporate debtor.

The Indian market is steadily harmonising itself with internationally accepted practices. The introduction of pre-packs gesticulates our readiness in reposing greater trust in our businesses. Pre-packs offer various advantages such as the relative informality of the process, shorter time for closure, cost effective, value maximisation, job preservation, court unburdening, etc. Interestingly, the Report suggests that the urgency to roll our pre-packs is such that the Code should preferably be amended by way of an ordinance to that effect. If pre-packs are introduced with the requisite safeguards, they could certainly play a major part in further expediting insolvency resolution processes, especially in fairly straightforward matters.

1 Page 13, the report on Pre-Packaged Insolvency Resolution Process, October 2020.

2 Page 30, ibid

3 Page 45-46, ibid