The Implementation Of pre-packaged Insolvency in India

The Implementation Of Pre-Packaged Insolvency In India

Author: Anuj Goel, MAIMS, Delhi.

Abstract

Pre-packs are mechanisms encouraging concerned stakeholders in the restructuring process to mutually negotiate the terms of restructuring, generally prior to the commencement of insolvency proceedings. While the parties can agree for a mutually cognizant resolution plan, it is expected that the formal recognition to the said plan would be given by the court. This might be a novel mechanism for restructuring in India, but it is already prevalent across many jurisdictions like US, UK, France and Germany. This paper examines the entire end in view for implementing pre-packs in India.

Introduction:

Pre-packs, contrary to the popular perception, is not essentially a complete out-of-court settlement between the parties involved, and the interference of courts/tribunals would be required for final implementation of pre-packs. Therefore, it can be said that it will be a hybrid process involving out-of- court settlement along with mutual settlement of the terms of restructuring between the debtors and the creditors. The court’s oversight is also necessary to ensure that no prejudice is caused to any stakeholders due to the terms of the restructuring arrived at and that everyone is treated fairly.

This might be a novel mechanism for restructuring in India, but it is already prevalent across many jurisdictions like US, UK, France and Germany. Pertinently, the practice of pre-packs was first introduced in the US, following the enactment of Bankruptcy Reform Act of 1978 which expressly allowed for pre-packs. In fact, pre-packaged proceedings have been considered more effective. While the practical aspect of the pre-packs differs across these jurisdictions, the major implementation remains the same coming out as a popular method of corporate rescue.

Pre-packs Proposition in India:

In India, the average time taken for completion of the process for resolution crosses the stipulated timelines under the IBC Code, 2016. Due to this, the government has been contemplating introducing pre-packs as alternative to help in reducing these timelines significantly. Apart from reducing the timelines, it will also be a welcome relief for the adjudicating authorities who are already overburdened with a large number of pending cases of such nature. Thus, it will not only promote cost and time efficiency by cutting litigation cost and less fillings, it will also help in de-clogging the whole overburdened NCLT ecosystem.

In the wake of COVID-19 pandemic, considering the fact that banks are already under and facing distress, the current blanket ban on fresh insolvency proceedings under section 7, 9 and 10 might not be a good step as it might lead to way of creating unscrupulous borrowers and will consequently increase more stressed debt levels at banks.

Given the above background, it might be the right time for the government to formally introduce pre-packs with a proper mechanism in place. This could achieve the dual objective of promoting debt enforcement and restructuring and mitigating the impact of COVID-19 on financially distressed businesses.

To pre-pack or not to pre-pack:

Just like any other course of action or new reform pre-pack has its own advantages and disadvantages. Apart of being less time consuming and cost effective than the normal CIRP process, pre-pack also give much required flexibility to debtors and creditors to formulate the terms of restructuring and help them in exercising greater control over the process. The most coveted benefit of pre-pack is that it promotes confidentiality during whole negotiation process, thereby avoiding adverse publicity of the company, which will eventually mitigate the image deterioration of the company.

Formal insolvency proceedings often lead to layoffs in the company due to reduced operation of the business and poaching of the employees to competitors of the debtor company. A pre-pack mechanism can help in reducing these risks and provide job security of employees since the outcome of the pre-pack is rescuing the business of the company rather than the company itself, thereby enhancing debt collection of the company.

Apart from the various benefits it offers, it also associates itself with some risks and challenges, which is important to be highlighted for a fair analysis. The major demerit of pre-packs is connected to one of its advantages i.e. confidentiality, which makes the process less transparent. It could lead to a situation where debtor could use the process to his advantage wherein, he ends up giving information of the mutual negotiation to only few of the financial creditors and agreeing to a resolution plan only with them. Thus, the interests of other stakeholders would be negated and genuine restructuring would not be possible.

Implementation and future of pre-packs:

Considering the fact that India does not have any prior regulatory experience with the respect to pre-pack and there exists no legal framework for the same, the introduction of pre-pack in India would essentially require some serious contemplation and due diligence. Introduction of such a mechanism for big corporates might be a risky option if not implemented well without knowing its effects.

Therefore, India can consider a phase-wise introduction of pre-packs. Upon getting favorable and successful outcomes in the first phase, based on the regular analysis of the process, the mechanism can be further expanded to other sectors. Given the fact that this would be a new reform that comes with its own sets of challenges and risks, it is suggested that in the first phase, the pre-packs are introduced in the Micro, Small and Medium Enterprises (MSMEs) sector.