Pre-pack insolvency framework likely soon; Panel to submit report in a week

Pre-packaged (pre-packs) insolvency resolutions are soon going to be a reality in India. The Committee set up under the Insolvency and Bankruptcy Board of India (IBBI) chairperson MS Sahoo to come up with the pre-pack insolvency framework for India is likely to submit its report in a week’s time, whole-time member of IBBI Sudhaker Shukla said this in an event organized by the Federation of Indian Chambers of Commerce in India (FICCI) today.

Shukla said that the report by the committee would be submitted in 7-8 days time. Earlier, the IBBI chairperson has said that the government has constituted a sub-committee of the Insolvency Law Committee recently to recommend the regulatory framework for pre-pack insolvency resolution process. “Likely, this would, require an amendment to the Code,” he had said then.

Pre-packs are court-administered resolutions or restructuring which do not require the need for a corporate debtor to go through the traditional insolvency route. Pre-packs are a hybrid between CIRP and an out-of-court restructuring.

Pre-packs are popular across the globe as an alternative to insolvency and bankruptcy processes as they yield faster results at a lower cost. With the onset of the Insolvency and Bankruptcy Code (IBC), the National Company Law Tribunal (NCLT) has been inundated with insolvency applications leading to delay in resolution of cases. In order to address this issue, the government has time and again talked about an alternative mechanism to resolve at least smaller cases of defaults so that the NCLT can take up bigger and economically more significant cases.

Recently writing for an annual publication of IBBI, chairperson MS Sahoo had said that the market has been advocating and anticipating a resolution framework which is a hybrid between the court supervised insolvency framework and out-of-court restructuring schemes that harnesses the best of both the worlds sans their demerits and provides a formal framework for resolutions that are happening today in the shadow or on account of the Code.

Most pre-packs across the globe start with an informal understanding, engage the stakeholders in between, and end with a judicial blessing of its outcome, though the nuances differ from one jurisdiction to another. Sometimes even within a jurisdiction, there may exist more than one variant of a pre-pack.

A February 2020 report by the Vidhi Centre for Legal Policy titled ‘Designing a Framework for Pre-packaged Insolvency Resolution in India’ sets out the beneficial aspects of pre-packs. These advantages are speed, confidentiality, statutory sanction and lower costs.

The report has proposed three kinds of pre-packs — pre-packaged insolvency resolution process, pre-arranged insolvency resolution process, and lastly a pre-arranged sale.

Earlier, the InsolvencyTracker.in had reported that former RBI governor Raghuram Rajan has also advocated for the need to have more out-of-court settlement of insolvency cases. “Out-of-court restructuring frameworks can be designed for time-bound negotiations between creditors of a stressed firm, failing which National Company Law Tribunal (NCLT) filing should apply,” he had said in a paper written with former RBI deputy governor Viral Acharya.