I. Introduction

The advent of Covid19 pandemic has not only caused fatal disruption in the normal lives of the population across the globe, but has also posed a herculean challenge before the governments and the ruling dispensation to keep the economy up and running. While the former is being attempted to be resolved by way of massive vaccination programme, an unorthodox effort is needed to address the questions of a sinking economy.

Considering the gravity of the situation and with an aim to prevent another global recession, institutions like the International Monetary Fund1 and the World Bank2 have issued suggestions to help and assist the economies transit towards normalcy. These includes halting the insolvency proceedings, promoting mutual settlements outside the courts, deploying mechanism of debt resolution for safeguarding healthy businesses from the danger of becoming insolvent due to the ill effects of the pandemic.3

The Indian response has also been in tandem to the aforesaid suggestions viz. increasing the limit of default from Rupees one lakh to one crore for filing an application for insolvency; extending the period of moratorium for repayment of loan by six months and extending the time for resolution under the prudential framework by 180 days.4

II. Categorising Insolvency Process: Formal and Informal Approach

Broadly, any insolvency proceedings are driven by two approaches, formal and informal. Formal approach includes initiating proceeding under a statute and to approach a judicial/quasi-judicial forum for enforcing the same. At the same time, an informal approach refers to a mutual resolution being devised between the parties without the invocation of any statutory provisions.

For instance, under the Indian scheme of things, formal approach would include- initiating corporate insolvency proceedings ("CIRP") under the Insolvency and Bankruptcy Code, 2016 ("IBC") and/or opting for the mechanism of scheme of arrangement as given under the Companies Act, 2013.5 Alternatively, informal approach shall include selecting the Reserve Bank of India's framework in relation to the resolution of stressed assets6 and/or reaching a mutual understanding between the debtor and creditor.

III. Pre-pack: hybrid of formal and informal approach

A pre-pack arrangement ("PPA") is a hybrid process of insolvency proceedings that initiates as a discussion for restructuring between the stakeholders, reaching an agreement catering to the concerns of the stakeholders and approaching the court for enforcement of the agreement so reached.

The practice and definition of pre-pack arrangements varies across jurisdiction. For instance, UNCITRAL refers to PPA as 'expedited reorganisation proceedings' involving voluntary negotiations, reaching consensus on the negotiated plan and providing legal sanctity to the plan by getting court's approval on the same as per the insolvency laws.7

IV. PPA vis-à-vis CIRP: which one is better?

The major point of contrast between both the processes of insolvency is the degree of party autonomy. While, under PPA scheme, parties enjoy a greater autonomy owing to minimal or no intervention of courts or of an insolvency professional, as the case may be. Further, PPA minimises the negative impact of insolvency on a stressed enterprise, as opposed to the dismissal of the entire board of directors under a conventional CIRP. Similarly, as compared to CIRP, PPA in other countries have proven to be a more economical and effective option for a corporate debtor and its creditors seeking an amicable resolution to their economic concerns.

V. Pre-Packs around the world

US Laws

Hybrid resolution solutions are provided under Chapter 11 of the Bankruptcy Code. There are three types of option available, namely, pre-arranged bankruptcy proceedings, pre-packed bankruptcy proceedings and pre-plan sales.8

  • Pre-Packed bankruptcy - A pre-pack under US laws has to follow the requirements of any resolution plan under Chapter 11 of the Bankruptcy Code, 1978. It thereby becomes binding on all parties involved.9
  • Pre-Arranged Bankruptcy - It is a hybrid of pre-pack and traditional bankruptcy proceedings. Herein, the key stakeholders that are most likely to be affected are consulted, followed by negotiations that takes place after the bankruptcy case is filed and court has issued a disclosure statement.10
  • Pre-Plan Sales - The same is envisaged under Section 363 of the Bankruptcy Code, 1978, whereby, the debtor by giving a 21-day notice to the interested parties may sell all assets of a business, without obtaining votes from all concerned parties.11

Therefore, the informal rescue procedures are also regulated by the legislation, which in turns protects the rights of the concerned parties or at least affords them a chance to be heard.

UK Laws

In UK, once a pre-pack agreement is negotiated, an administrator is appointed to manage the business, though, permission of a Court is not required to formulate a pre-pack. Herein, the same is negotiated by an insolvency professional who is bound to follow Statements of Insolvency Practice issued by the Joint Insolvency Committee (an executive arm of Department of Business Innovation and Skills). Further, he also has the responsibility to ensure that the arrangement is fair to the stakeholders and creditors.12

VI. Designing a PPA in India

A. The objectives to be considered while advancing a PPA plan under IBC

The Sub-Committee Report13 issued by the Government aims to adopt PPA within the IBC framework, instead of formulating a separate legislation for it. Therefore, every pre-pack arrangement negotiated between the creditors and debtors should also advance the objectives of the IBC. This would include:

  1. Rehabilitation - Rehabilitation is the core objective of the IBC. Along with facilitating rehabilitation, the Sub-Committee suggested that instead of pre-pack sale of assets as adopted by some foreign jurisdictions, pre-pack resolution of the corporate debtor should be adopted in India.
  2. Asset Maximization - The principle of maximization of the value of the assets is followed by all the jurisdictions. The Sub-Committee suggested that while formulating pre-pack arrangements, the business should be least interrupted and cost savings measures should be incorporated in furtherance of this principle.
  3. Waterfall Mechanism - The Sub-Committee suggested that PPA should follow the waterfall mechanism mentioned for liquidation under the IBC14, while determining the priority of distribution rights among the creditors. 

B. Regulations suggested by the Sub-Committee

  1. Who should initiate - The Sub-Committee suggested that corporate debtors should initiate PPA. This decision was taken considering the fact that in foreign jurisdictions it is the corporate debtor that initiates the pre-pack process and is generally, the only one interested in reorganization of assets. He should, therefore, be allowed to reach the Court voluntarily, after taking consent of key stakeholders.
  2. Who should authorize - The Sub-Committee deemed it appropriate to put in safeguards in order to prevent the use of this restructuring tool. It therefore, suggested consent of simple majority of shareholders before a pre-pack process can be initiated by the corporate debtor. Similarly, it also suggested that the pre-pack negotiations should be approved by the simple majority of the unrelated financial creditors before it can be initiated.
  3. When to initiate - It was debated whether pre-packs should be allowed to be initiated only when there is a default or when a company is in stress. The Committee finally decided that restructuring poses a cost to the society and stakeholders, therefore, it is suggested that pre-packs be allowed when a debtor makes a default. It is the paramount test for insolvency and is easy to prove. The Committee further suggested that this default should range from 1 Lakh to 1 Crore and be exempted from the orders passed by the Government regarding the situation due to Covid. Suggestions were also made that this threshold should be modified by the government regularly, taking it as low as Rs. 1 when the market permits. Once the mechanism is aptly embedded in the system, pre-pack should be allowed to be initiated even for pre-default stress. Though, a majority vote of 75% would be required in that scenario in order to avoid misuse.
  4. Moratorium & Timeline - The Sub-Committee decided to apply Section 14 of the IBC to pre-packs as well but warned that the same might be misused. For the very reason, no extension of the moratorium period is to be allowed. Following the same spirit, the moratorium is to be applied only for 90 days from the pre-pack commencement date & additional 30 days are given to the adjudicating authority to then approve the plan. It is to be noted that under this mechanism the decision making power remains with the promoters of the company even after the moratorium commences.
  5. Section 29A of the IBC - The Sub-Committee strongly recommended application of Section 29A, which forbids certain set of people to submit a resolution plan in a CIRP, to the pre-packs as well. The members debated relaxing sub-section (c) in relation to MSMEs but the same was negated by the majority.
  6. Liquidation - If a company fails to negotiate a pre-pack and is of the opinion that liquidation is the only solution, then the Committee of Creditors ("CoC") can proceed with the same but the threshold of votes would be higher. Though, the same cannot be allowed in cases wherein pre-pack was negotiated due to pre-default stress or when the default was below the notified threshold for CIRP.

VII. Analysis & Conclusion

To ensure the supremacy of the IBC, the Sub-Committee has recommended that the basic tenets of IBC viz. control by creditor, imposition of moratorium and accepting the resolution plan, should be followed while devising a PPA.

One of the major concerns about PPA is taking away power from other stakeholders, like the operational creditors. It has been observed in the UK that the marketing exercises are not properly undertaken by the insolvency professionals. Alternatively, the mechanism is also known to be initiated by debtors in cases wherein there is no technical insolvency, just to re-engineer their balance sheet.15

Though the sub-committee has incorporated appropriate recommendation directing that the rights of the parties should not be compromised and any kind of abuse should be avoided by adopting the required checks and balances. Further, the Sub-Committee has entrusted the IP to ensure that all creditors are treated in a fair manner. As pointed out in Report published by Vidhi16, it is suggested that as provided under the UK laws, pre-pack plans should go through a body of experts called 'pre-pack pool', before they are presented to the CoC. This may ensure appropriate realization value and give an independent opinion on the resolution plan. Though, this suggestion was discarded by the Sub-Committee on the basis of overregulation. Further, the Vidhi's Report even suggested making available in India the mechanism for pre-arrangement sales and pre-Arranged Insolvency Resolution Process, though the same was not taken into account by the Sub-Committee.

Adopting PPA instead of initiating CIRP (since they cannot exist simultaneously17) may not only streamline the entire insolvency process but also provide relief to the creditors being adversely impacted by the government's orders suspending the initiation of insolvency proceedings due to  Covid pandemic. Nevertheless, India's willingness to experiment with hybrid concepts such as the pre pack arrangement is a welcome step and a hope for every creditor that is facing a pertinent risk of financial loss as a fallout owing to the pandemic.


1. Antonia Menezes and Sergio Muro, COVID-19 Outbreak: Implications on Corporate and Individual Insolvency, COVID-19 Notes, Finance Series, World Bank Group, April 13, 2020.

2. Yan Liu, José Garrido, and Chanda DeLong, Private Debt Resolution Measures in the Wake of the Pandemic, IMF Special Series No. COVID-19, May 27, 2020.

3. Pre-packaged Insolvency Resolution Process, Report of the Sub-Committee of the Insolvency Law Committee, Ministry of Corporate Affairs, Published on October 31, 2020

4. The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020, regularised by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2020.

5. Section 230, of the Companies Act, 2013.

6. Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions, 2019, published on June 07, 2019, https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=47248.

7. UNCITRAL Legislative Guide on Insolvency Law, United Nations, 2005.

8. Sen & Prakash, Designing a Framework for Pre-Packaged Insolvency Resolution in India, 2020, Vidhi, Report-on-Pre-Packaged-Insolvency-Resolution.pdf (vidhilegalpolicy.in)

9. Xie, B, Comparative Insolvency Law: The Pre-pack Approach in Corporate Rescue, Edward Elgar Publishing, 2016.

10. Out-of-court Workouts Prepacks and Pre-arranged Cases A Primer, American Bankruptcy Institute, 2005 Out-of-court Workouts Prepacks and Pre-arranged Cases A Primer | ABI

11. Supra @8.

12. Pre-Pack Administrations Overview, Lexis Nexis, 2020 https://www.lexisnexis.com/uk/lexispsl/restructuringandinsolvency/document/393781/55KG-P041-F18C-C1DG-00000-00/Pre_pack_administrations_overview.

13.Supra @3.

14. Section 53, Insolvency & Bankruptcy Code, 2016.

15. Teresa Graham, 'Graham Review into Pre-pack Administration: Report to The Rt Hon Vince Cable MP' (2014), paras 7.64, 7.65, 7.78-7.81, http://data.parliament.uk/DepositedPapers/Files/DEP2014-0860/Graham_review_into_pre-pack_administration_-_June_2014.pdf.

16. Supra @8

17. Himani Singh, Pre-packaged Insolvency in India: Lessons from USA and UK, Harvard Law School, Bankruptcy Roundtable, 2020 https://blogs.harvard.edu/bankruptcyroundtable/tag/pre-packs/

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