Insolvency and Bankruptcy Code

What are Pre-packs under the present insolvency regime?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Pre-Pack

Mains level : Asset reconstructions process under IBC

The Ministry of Corporate Affairs (MCA) has set up a committee to look into the possibility of including what is called “pre-packs” under the current insolvency regime to offer faster insolvency resolution.

Practice question for mains:

Q.What are the key features of the Insolvency and Bankruptcy Code? Discuss how operationalization of IBC is hindered by the slower resolutions of insolvency cases. Suggest measures for faster resolution.

What is Pre-pack?

  • A pre-pack 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.
  • This system of insolvency proceedings has become an increasingly popular mechanism for insolvency resolution in the UK and Europe over the past decade.

Why need Pre-packs?

  • 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.
  • Under the IBC, stakeholders are required to complete the CIRP within 330 days of the initiation of insolvency proceedings.

A case for India

  • In India’s case, such a system would likely require that financial creditors agree on terms with potential investors and seek approval of the resolution plan from the National Company Law Tribunal (NCLT).
  • This process would likely be completed much faster than the traditional CIRP which requires that the creditors of the distressed company allow for an open auction for qualified investors to bid for the distressed company.
  • The process needs to be completed within 90 days so that all stakeholders retain faith in the system and cases that take more than this time should be taken through the normal CIRP.

What are the other key benefits of a pre-pack?

  • Pre-packs would mostly be used for businesses that are running; the investors would likely need to maintain good relations with operational creditors.
  • In the case of pre-packs, the incumbent management retains control of the company until a final agreement is reached.
  • The transfer of control from the incumbent management to an insolvency professional as is the case in the CIRP leads to disruptions in the business and loss of some high-quality human resources and asset value.

Some limitations

  • The key drawback of a pre-packaged insolvency resolution is the reduced transparency compared to the CIRP.
  • Financial creditors would reach an agreement with a potential investor privately and not through an open bidding process.
  • 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.
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