Understanding the proposed Pre-packaged Insolvency Resolution Process and its implications

The Insolvency and Bankruptcy Code (IBC), 2016 was introduced to consolidate a plethora of legislation covering insolvency resolution and realisation of assets, which dictated the insolvency regime in a tedious and haphazard manner. A multiplicity of legal alternatives had detrimentally affected the faith of creditors by compromising their statutory rights and adding the heavy burden of Non-Performing Assets.

The present article analyses on one such legal alternative, the proposed Pre-packaged Insolvency Resolution Process.

A sub-committee of the Insolvency Law Committee (ILC) was constituted by the government in order to structure the pre-pack framework. The ILC has designed a pre-pack framework within the basic structure of the IBC for the Indian market. The same has been detailed in their report of October, 2020. The Ministry of Corporate Affairs (MCA) vide a notice dated January 8, 2021, also invited public comments and views on its proposed Pre-packaged Insolvency Resolution Process (PIRP).

Understanding pre-packaging

Pre-packaging is not a scheme indigenous to India, rather it is a global technique employed by various countries. By building up on an informal understanding between the stakeholders, the pre-pack scheme relaxes the whole process of corporate liquidation, thereby relieving the Corporate Debtor (CD) of the stress attached.

With the background of the formal process in India being afflicted with high costs, the PIRP allows for a cost-effective and speedy resolution process. PIRP also identifies and alienates the role of tje Insolvency/Resolution professional as an expert in the process.

Aim of proposed Pre-packaged Insolvency Resolution Process

Under the IBC, 2016 the standard procedure is the Corporate Insolvency Resolution Process (CIRP). The financial slowdown during the COVID-19 saw a scarcity of resolution applicants for the revival of the CD, elongating the stress period and the creditor’s expectations. Pre-pack aims to better accommodate the CD, and provides a middle route by adopting the privileges of CIRP and the flexibility of an out-of-court settlement.

According to the October 2020 report of the ILC, pre-packs shall effectively blend with the existing formal structure, enabling the concerned shareholders to choose the process they want. The ultimate aim of the PIRP is to be the primary resolution process and to enable only a minority of cases being handled through CIRP.

The ILC sub-committee responsible for the proposed pre-pack believed in three principles that the scheme would be based on:

1. The basic structure of IBC, 2016 be retained.

2. There should not be any compromise of rights of any party.

3. There must be adequate checks and balances to prevent abuse.

Further, the ILC also identified three basic features which showcase what the basic structure of the Code entails:

1. Creditor in Control

2. Moratorium during resolution

3. Binding Nature of an approved resolution plan

Significance of the Pre-packaged Insolvency Resolution Process

The ILC has recommended that introduction of a PIRP would be expedient within the present scenario of high expectations of initiations of insolvencies after the expiry of the moratorium. Its implementation is envisioned to be parallel with the CIRP so that liquidation becomes a matter of last resort for stakeholders.

Some of the important features of the PIRP are mentioned in the table below:

Benefits of the Pre-packaged Insolvency Resolution Process

PIRP consolidates the benefits of both formal and informal proceedings and its availability in consonance with CIRP broadens the options for stakeholders and strengthens their trust in the process. This coupled with the fact that PIRP is more informal, cost-effective and takes less time to conclude, allows companies smoother insolvency proceedings.

A faster recourse to a resolution plan in consultation with the stakeholders before invoking the PIRP would allow for maximisation of the value of assets. Also, the provision for commencement of the proceedings under PIRP on the first instances of default would limit the scope of liquidation and the objective of sustaining the business can be achieved.

Meanwhile, the proposed PIRP will also help in reducing the burden on courts by reducing the number of resolution matters being taken up by the concerned Adjudicating Authority. With the Supreme Court recently announcing that the suspension of IBC was retrospective in nature, the sudden increase in cases being filed will only increase as the suspension ends. At this point, the scheme could really shine and help reduce the burden of the Adjudicating Authority.

With the suspension of IBC until March 2021, a pre-pack scheme could very well prove to be the relief that certain promoters and CDs are looking for. And with proper implementation, PIRP could be the light at the end of tunnel needed.

What the future holds

According to Chairman of the Insolvency and Bankruptcy Board of India MS Sahoo, the pre-pack scheme would be available pre and post-default. Further, to avert unwanted delay, the government may even consider setting up specific benches to reduce the load of cases of the National Company Law Tribunal (NCLT).

Essentially a restructuring policy, the pre-pack scheme signifies an amalgamation ‘corporate restructuring’ and ‘debt restructuring’. Corporate restructuring signifies a simple or drastic change in the relationship between companies or within them, while debt restructuring means an agreement between a creditor and the organisations to reorganise liabilities. This was a welcome breath of fresh air as the existing schemes including the CIRP presented liquidation as consequence of failure. The Micro, Small and Medium Enterprises (MSME) industry was suffering the most from it, as there was a lack of investors.

Through the current scheme, a CD will be able initiate pre-pack before initiating any proceedings under the IBC. The action plan for a CD will be to formulate a pre-pack before insolvency begins and upon finalisation, such debtor will be able to file a CIRP subsequently. Pre-packs will thus not function separately, but will be integrated with the CIRP. The benefit would be avoiding the formal procedure and saving precious time.

The catch here is that while it is a great scheme, should it be implemented now? With the COVID-19 pandemic still going on, the scheme cannot be implemented any time later. The earlier the better, as a lot of MSMEs have suffered in the pandemic. The legislature needs to find an adequate balance between implementing the scheme as soon as possible and implementing it effectively. A lack of procedural safeguards will lead to more chaos than progress. Nonetheless, the scheme has been recommended at a time of distress, and can serve the purpose of reducing or compensating for that distress. If implemented successfully, it will be a great resolution option.

Of late, Alternative Dispute Resolution has been recommended in lieu of civil litigation and informal mechanisms are being professed by the authorities for amicable resolution of disputes. Pre-packaging acts as an informal avenue under the ambit of IBC and seeks to expeditiously resolve liquidation processes. The present regime of IBC has laid down impeccable results including successful resolution plans and revival of industries, and the law is evolving to better accommodate all stakeholders. The PIRP option is an effort to improve the efficacy of IBC by reducing the burden on various entities involved in the resolution process.

Although pre-packaging is envisioned as a simpler resolution process, there are apprehensions expressed by stakeholders, which have been discussed by the ILC. Lack of transparency, concerns regarding valuation, and confidentiality are a few drawbacks associated with the PIRP. A lack of transparency might lead to abuse and it is to prevent such abuse that the proper framework needs to be laid before any such scheme is rolled out. Nevertheless, the PIRP is a welcome move for all sorts of entities looking to commence insolvency proceedings.

Zorawar Singh is a Senior Associate and Hitesh Mankar is an Associate at JM Legal, a New Delhi based law firm.