The government is likely to amend the Insolvency and Bankruptcy Code (IBC) to introduce pre-packs as a resolution mechanism, according to a government official aware of the developments.
A pre-pack is an agreement for a distressed company’s debt resolution between secured creditors and investors instead of a public bidding process, as under the Corporate Insolvency Resolution Process (CIRP) of the IBC.
The Corporate Affairs Ministry, last year, formed a committee led by MS Sahoo, chairperson of the Insolvency and Bankruptcy Board of India, to look into including pre-packs as a resolution mechanism under the IBC. Pre-packs may also offer an alternative for creditors to initiate insolvency proceedings as the government has suspended initiation of fresh cases for any defaults occurring post-March 24. The government, in June, issued an Ordinance preventing initiation of insolvency proceedings against companies for defaults in the six-month period starting March 25 under the IBC and, subsequently, extended the suspension till March 24, 2021.
Non-adherence of prescribed timelines under the IBC is a key criticism that the government is seeking to address through the inclusion of pre-packs under the IBC, with 1,442 of a total 1,942 ongoing insolvency proceedings having passed the 270-day mark.
“The government may seek to introduce pre-packs under the IBC in the next session of Parliament,” said the official. The mechanism that will need to be initiated after approval by the National Company Law Tribunal (NCLT) will allow 90 days for creditors to arrive at an agreement with a potential bidder and a further 30 days for approval by the NCLT.
Experts noted that the process is relatively opaque, compared to the CIRP – under which any eligible party is permitted to place a bid that is considered by a Committee of Creditors (CoC).
The Sahoo committee report has recommended that all pre-pack agreements in which operational creditors are set to receive less than a full recovery be open to a swiss challenge, under which any eligible third party would be permitted to offer an improved bid. The initial bidder would, in such cases, have the option to match the improved bid to get approval for the pre-packaged agreement.
In cases where operational creditors are set to receive 100 per cent recovery, however, the decision on whether to open the agreement to a swiss challenge will be left to the CoC, which would comprise financial creditors as in the case of the CIRP.
“The inclusion of pre-packs should certainly help in expediting the insolvency resolution, which has significantly exceeded prescribed timelines in many cases under the CIRP,” said Rajiv Chandak, partner at Deloitte India, adding the government should consider creating specific Benches to deal with pre-packs to ensure that such cases are not delayed due to the heavy case load of NCLTs. Chandak also noted that the inclusion of swiss challenge was likely aimed at preventing future litigation from operational creditors, who receive marginal recoveries under the insolvency resolution process.
Neeraj Dubey, partner at law firm Singh and Associates, said the pre-pack process would be more streamlined with lower involvement from the NCLT, but noted that “parties need to focus on good corporate governance and not try to circumvent any of the processes defined under pre-pack regulations” as this would bring increased scrutiny from NCLTs and defeat the purpose of pre-packs.
Dubey also noted that pre-packs may assume greater importance if the government decides to extend the suspension of insolvency initiation beyond March.
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