New pre-pack framework allows promoters to keep control of CD; stipulates a shorter timeline

And the much-awaited pre-pack scheme is here. The government-constituted sub-committee of Insolvency Law Committee has finally drafted the pre-pack framework, which it released today for comments from public.

According to the draft pre-pack framework, only a corporate debtor can initiate pre-pack process with simple majority consent of unrelated financial creditors and shareholders. During the process, the existing management will be in control of the operations of the company unlike in the corporate insolvency resolution process (CIRP), where the management is suspended and the resolution professional (RP) runs the business of the company in collaboration with the committee of creditors (CoC).

It would be the corporate debtor’s responsibility to make available an updated list of outstanding claims, including contingent and future claims, and a draft information memorandum, based on its books, duly certified by its chairman/managing director/managing partner along with an indemnification that if any claim is omitted, they will be personally liable to make such claim good.

Further, if the corporate debtor willfully provides any wrong information or omits to provide material information with respect to any claim, the same will attract criminal liability.

The moratorium under section 14 will be available from the pre-pack commencement date till closure or termination of process, whether by approval of resolution plan or otherwise. It should not, however, cover essential and critical services.

The draft framework envisages a 120-day timeline for completion of the process –90 days for filing of resolution plan with the adjudicating authority (AA) plus 30 days for AA to approve it.

An insolvency professional should play the role of resolution professional in pre-packs, but he should only conduct the process and not run the operations of the corporate debtor.

The CoC will take decisions with the approval of required majority of votes, present and voting. Only the decision to liquidate the CD would require approval by 75% of voting share. The CoC may decide to close the process with approval of 66% of voting share, present and voting, if the CD engages in any activity which has potential to cause depletion of assets or value to the detriment of creditors. It may even decide with 75% of voting share to liquidate the CD at any time during the pre-pack process.

As per the framework no two proceedings — pre-pack and CIRP – can run in parallel. There should be a cooling off that a pre-pack cannot be initiated within three years of closure of another pre-pack.

Pre-pack should be available for all CDs and for any stress — pre-default and post-default. Depending on policy objective, capacity of the NCLT and availability of Special Insolvency Resolution Process (SIRP) for MSMEs, the implementation could be phased.

It may commence in respect of defaults from Rs 1 lakh to Rs 1 crore and COVID-19 defaults for which CIRP is not available today, followed by default above Rs 1 crore, and then default from Re 1 to Rs 1 lakh.

The pre-pack framework will be open for public comments till the end of business hours on 22nd January 2021.

Salient Features of Pre-pack vis-a-vis CIRP