Pre-pack resolution: A faster alternative to an insolvency proceeding

With the National Company Law Tribunal (NCLT) inundated with cases under the Insolvency and Bankruptcy Code (IBC) leading to unending delays in the resolution of loan default cases, the government and regulators alike have been advocating for pre-pack resolutions of smaller cases so as to ease the burden on the IBC infrastructure.

Even the former Reserve Bank of India (RBI) governor Raghuram Rajan and former deputy governor Viral Acharya in a jointly written paper has recently proposed out-of-court restructuring to make the insolvency ecosystem more efficient.

What is a pre-pack resolution?

So what is a pre-packaged or pre-pack resolution/insolvency? 

A pre-pack insolvency means selling all or part of a distressed company’s business or assets before it could go into insolvency. The sale is negotiated prior to the appointment of an administrator or resolution professional, who could then put seal of completion of the process. Basically, it is kind of an out-of-court settlement, which saves time and efforts of all the stakeholders.

The benefit of a pre-pack resolution is that it helps preserving the value of the company by avoiding a time consuming, yet uncertain insolvency procedure. A pre-pack resolution also means minimum business disruption for customers, vendors as well as employees.

Since it’s a quicker way of resolving a loan default case, it is also a much cheaper process. Besides, it protects the goodwill of the corporate debtor as well.

How does a pre-pack resolution work?

The US and UK are the two countries where pre-pack resolution are used frequently. Of course, the basic character of the pre-packs in both the countries may be same, there are procedural differences.

In UK, an insolvency practitioner or one or more IP firms are engaged by the company or its creditors ahead of the sale. The IP or the IP firm(s) then look for potential buyers, invite claims from creditors, negotiate the deal, etc.

The potential buyers could also be the promoters or directors of the corporate debtor.

A pre-pack insolvency, no doubt, is a quicker way of finding a resolution than going into the insolvency process, but it requires the insolvency practitioner to keep the interest of all the stakeholders in mind.

The IP must be guided by the Statement of Insolvency 16 (SIP 16) guidelines while going for a pre-pack resolution.

He must provide creditors with a detailed narrative explanation and justification of why a pre-packaged sale was undertaken and all alternatives considered, to demonstrate that the administrator has acted with due regard for their interests.

In the US, pre-packs are undertaken under Chapter 11 of the US Insolvency Code. Unlike in the UK, where the pre-pack resolution is carried out under the administration of an IP, in US the debtor remains in possession of the assets even as it negotiates the terms of the pre-pack resolution.

Whether the debtor is in control (as in the US) or not (as in the UK), the final approval of the pre-pack is given by an adjudicating authority.

India, which is now considering putting up a similar pre-pack arrangement as an alternative mechanism can learn from the best practices of both the countries. However, if we look at India’s Insolvency and Bankruptcy Code (IBC), it looks more influenced by the UK insolvency law than the US law.

It is to be seen if the government favours the UK or the US system when it finally unveils the pre-pack resolution.