Since the start of the year 2019, the Government of India has been planning to introduce the concept of Pre-Package Insolvency Schemes in the Indian Insolvency & Bankruptcy Code ("IBC"). Now due to COVID-19, the businesses all over the country have faced the worst hit since the global economic slowdown of 2008-2009 and it is imperative that the Government would chalk out a more concrete plan for the implementation of this system.
Pre-packaged schemes are already prevalent in the UK and the USA and the idea behind it is to approach the court with the already negotiated restructuring plan for the company. This is being implemented in India with the motive that with a timely resolution of stressed companies, their actual market value can be received without any depreciation or deterioration.
WHAT IS PRE-PACKAGED IBC SCHEME?
A pre-packaged scheme is an arrangement under which stressed company and the purchaser negotiate the sale of all or part of a company's business or assets prior to the appointment of an insolvency professional as administrator. The completion of such a transaction is conditional on the scrutiny of details by the Insolvency professional appointed and until he gives a nod for the sale to be effected, the consideration by the purchaser is held in an escrow account.
The main objective of bringing in this concept is to aid the insolvency framework, avoid spending time and money in court proceedings & legal battles and directly move to getting a fair resolution for the company, which was the very objective of the IBC in the first place.
It is suggested that the proposed plan should have an assent from at least two-third of the creditors before it is being put before the NCLT for its approval. Since the plan would already be endorsed by the lenders, it will effectively bypass various requirements and interventions by the NCLT at different stages under the usual IBC process and would help unburden the already over-burdened NCLTs.
Such a pre-pack process can also be considered as a process preceding the usual course of insolvency under Section 7, 9 and 10. A pre-pack process is carried out by the debtors who try to keep their entity afloat and try to negotiate with the creditors for a resolution of the debt. Therefore, if such a process fails, it can always lead to a creditor filing an application under Section 7 or 9 of the IBC and triggering insolvency.
WHAT WOULD BE THE IMPACT?
Though there are apprehensions regarding the success of pre-pack IBC schemes in an already nascent and developing Indian IBC law, it still has many benefits that are very hard to ignore. First & foremost, in most cases it would provide a better return to the creditors. It is often seen that during a normal resolution process under IBC, the value of the assets of the company erodes which ultimately leads to lesser pay to the creditors from the proceeds of the resolution plan. In a pre-pack scheme, the value would be determined beforehand which would yield better returns to the creditors.
Secondly, it would definitely lead to saving of time, money and resources that are spent for months on legal battles in the NCLT. Not to mention, the professional fee involved of various professionals hired to carry out the entire process also takes a toll on the Committee of Creditors who then sometimes try to bail out of it with whatever return they could get.
Thirdly, there is a surety of the outcome since the resolution plan has been discussed and finalized beforehand and the insolvency professional appointed only has to ensure that everything being done is procedurally and legally tenable. This gives a lot of confidence to the creditors since they are assured of their money and helps put more faith in the Corporation Insolvency Resolution Process ("CIRP").
Lastly, it would also reduce the burden on the NCLTs. Most resolutions plans presented before the NCLT then have different stakeholders filing different sorts of applications to delay or suspend the process. This creates a mess in the proceedings and often leads to prolonging the proceedings to the extent where every stakeholder incurs a loss. To avoid that, a pre-packaged scheme would help reducing the workload and provide a more efficient resolution.
A major issue that may arise during the pre-pack scheme implementation is that it would not have the shield of moratorium like it is there when a case is admitted under Section 7 or 9 of IBC. Therefore, creditors may enforce their rights and remedies while the company is negotiating for a pre-pack scheme. This would be a huge hurdle that the scheme would face in its implementation.
With the current Pandemic creating havoc in almost every industry, it is almost certain that a lot of companies would be pushed into insolvency in the coming times and there this scheme of pre-packaged deals would really act as a blessing in disguise.
With a trend that we have observed in the past 3 years of IBC is that creditors, especially operational creditors, are never sure of the return that they would be getting from the resolution plan and more often than not, it ends up disappointing most creditors.
3254 companies were admitted for insolvency till December, 2019 out of which resolution plans have been approved for only 190 cases, i.e., less than 10%. 246 cases have been shut on appeal or review and there have been 780 cases where liquidation proceedings have begun. This statistics shows that no matter how efficient we think the current system is, there is a huge scope of improvement and the pre-pack IBC deals could bring in that changed.
This system will also flush out the uncertainty revolving around on whether the stressed assets will draw adequate interest from bidders and in cases where they do so, whether lenders will accept such bids.
The pre-pack system has its own share of criticism as well and some people do believe in the old school idea of increasing the number of benches of NCLT and sticking to the already existing provisions rather than bringing in new provisions. There are some reservations against the system based on the fact that bidders close to the promoters or who can see the company through the eyes of the promoters will have an advantage over the others.
Obviously there are challenges around the system such as the cooperation between the existing and the new management, balanced recognition of all the stakeholders, eligibility of the corporate debtor, the transparency of the entire process and most importantly, whether Section 29A would still be applicable in a pre-pack scheme or would it be relaxed. The entire process would have its share of difficulties as well. Therefore, it is important to strike a balance between the existing and the new system.
It is expected and emphasized that if the pre-pack system is implemented well, it would lead to smoother implementation of resolution plans, would promote growth and keep the company as a going concern while retaining jobs and ensuring creditors receive the funds due to them. Especially during these difficult financial times, it is imperative that such a system would only yield fruitful results and would have more pros than cons.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
This content is purely an academic analysis under "Legal intelligence series".
© Copyright AMLEGALS.
Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion, advice or any advertisement. This document is not intended to address the circumstances of any particular individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a particular situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.