Pre-Packaged Insolvency Resolution Procedure

• Published date: 05 May 2021
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy
• Law Firm: King, Stubb & Kasiva
• Author: Mr Abhishek Bagga

Pre-pack is a type of restructuring in which creditors and debtors collaborate on an informal agreement before submitting it for approval. Micro, Small and Medium enterprises companies are typically run by promoters, making it impossible to resurrect them if the administration is removed under the standard Corporate Insolvency Resolution Process ("CIRP"). The latest ordinance encourages current promoters to participate, with the board maintaining power and the debtor presenting the base resolution package, which will then be put to the bidding process through the Swiss challenge. As a result, pre-packs will assist corporate debtors in reaching an agreement with creditors and addressing the whole liabilities side of the company.

The concept of pre-pack has a wide interpretation, but Bo Xie in his book on Comparative Insolvency Law has precisely defined the concept of pre-pack as "Pre-pack has emerged as an innovative corporate rescue method that incorporates the 65 virtues of both informal (out-of-court) and formal (judicial) insolvency proceedings".¹ Further, Vanessa Finch has given a common man understanding of the process as, "a troubled company and its creditors conclude an agreement in advance of statutory administration procedures" which "allows statutory procedures to be implemented at maximum speed."²

The Insolvency and Bankruptcy Code, 2016 ("Code") was adopted to address India's escalating stress assets in a timely and effective manner. The current code's key feature is its quick method and time-bound operation. As a result, the Code establishes stringent deadlines for completing the CIRP; if a business debt is not settled by these deadlines, it will be forced to liquidate. Certain times, such as those spent in court hearings, have been omitted from the IBC's mandatory deadlines due to statutory precedent.³ The pre-pack phase was necessary because the corporate debtor can engage in a management buyout agreement before the pre-pack phase, and transfer assets to some other organization. Even so, such a valuation would not be approved by a court or an adjudicating authority, and it would be subject to challenge by creditors if it included transactions forbidden by the Code, in order to protect creditors' preferences.

Via an Ordinance dated April 4, 2021⁴, the government established a Pre-Packaged Insolvency Resolution Procedure ("PPIRP"). The Ordinance amended and added Chapter IIIA to the IBC and provided a "pre-packaged insolvency resolution process for corporate persons classified as micro, small and medium enterprises ("MSMEs")." Due to the extreme economic problems posed by COVID-19, the Preamble asserts the importance and urgency of such intervention. The ordinance sets Rs. 10,00,000 default requirements for an MSME corporate debtor to initiate a pre-packaged insolvency resolution process. The modification would alert the minimum default value for starting the settlement process, while the pre-packaged resolution is for defaults up to Rs 1,00,00,000. The ordinance for PPIRP for MSMEs will help the sector in many ways. It is a time and budget insolvency resolution that will trigger minimal market uncertainty, maximize value, protect jobs, and reduce the workload on the NCLT.

International Provisions

Pre-packs are referred to as "expedited reorganization proceedings" by the United Nations Commission on International Trade Law (UNCITRAL), because they combine voluntary restructuring negotiations, in which a plan is negotiated and agreed to by the bulk of impacted stakeholders, with reorganization proceedings that are started without delay.⁵

South Korea's Rehabilitation and Bankruptcy Act's⁶ pre-packaged plan restructurings scheme has proven to be an effective tool for facilitating insolvent company recovery in a shorter period of time, and it is intended to be commonly used by many distressed firms in need of restructuring and sustainability. The Korean judiciary is also expected to take a far more notable proportion in the pre-packaged deal restructuring by holding consultations with the claimant, lenders, and concerned parties in order to achieve the restructuring's initial target.⁷

In the United Kingdom, although the judiciary has embraced the evolution, the Insolvency Act of 1986 did not allow for or control pre-packaging, which has evolved out of commercial practice through business and technical innovation. It's a traditional technique for operating a corporation as a going concern that involves using the executive's incentive to dispose of a corporate resource without the consent of creditors. Nevertheless, the procedure has raised questions about accountability and transparency, especially when a sale is made to a related party or when the insolvency practitioner has a conflict of interest. In the year 2009, the Insolvency Practitioners Association released the Statement of Insolvency Practice 16 (SIP)⁸ to resolve the grievances by regulating pre-pack via administrator control. The SIP lacked any form of transparency for unsecured creditors. The growing concerns led the British Government to note the restricted usage of the pre-pack pool⁹ aimed at giving creditors and other investors trust that a linked entity pre-pack sale is acceptable during a study of the efficacy of voluntary initiatives implemented in 2015. It has introduced new legislation to enable pre-pack transactions to related parties to be scrutinized, building on existing voluntary initiatives and mitigating the negative effects of the pandemic's expanded use of pre-pack transactions.¹⁰ As a result, the pre-package, which began as an informal agreement between the parties, is increasingly becoming more governed in order to resolve emerging concerns.

The pre-packaged insolvency proceedings in the United States of America and pre-arranged bankruptcy proceedings under Chapter 11 are all permitted under Section 363 of the United States Bankruptcy Code.¹¹ Pre-plan transactions are close to pre-pack sales in the United Kingdom. It enables an insolvency trustee, or administrator in the United Kingdom, to sell all or substantially all of a CD's assets until it...