The MCA has released the report of a sub-committee of the Insolvency Law Committee (ILC) tasked with preparing a detailed scheme for implementing a pre-packaged (pre-pack) and prearranged insolvency resolution process. The sub-committee, in its report, has designed a pre-pack framework within the basic structure of the Insolvency and Bankruptcy Code, 2016 (the “Code”) for the Indian market. As its nomenclature suggests, pre-pack is a restructuring plan which is agreed to by the debtor and its creditors prior to the insolvency filing, and then sanctioned by the court on an expedited basis.
In drafting this framework, the sub-committee noted the various options presently available to a creditor for resolution of stress of its debtors, namely, the two court supervised statutory options of CIRP under the Code and scheme of compromise or arrangement (SoA) under the Companies Act, 2013, and the two out-of-court options, namely, RBI’s prudential framework for resolution of stressed assets and informal understanding between a debtor and creditor, with /without help of a mediator. It also examined pre-pack frameworks in select jurisdictions of UK, USA, Singapore, France, Canada and found that pre-pack is an innovative corporate rescue method that incorporates the virtues of both informal (out-of-court) and formal (judicial) insolvency proceeding.
The report recommends the simplest variant of a pre-pack, requiring the least preparation, which can be rolled out within the existing ecosystem as an additional option for resolution. This may be introduced in the Code by an Ordinance so as to constitute the formal part of the pre-pack, while the informal part could be left to market practice or guided by self-regulation, guidelines, best practices, etc. In any case, the new provisions would ensure that they do not impair rights of any party beyond what is provided in the Code and have adequate checks and balances to prevent any abuse.
The proposed legal framework of a Pre-pack is as under:
The CD should have access to interim finance subject to the approval of CoC, as is the current requirement under section 28 of the Code and it shall be included in the insolvency resolution process cost (IRPC). The IRPC for the purpose of pre-pack shall mean interim funding. The fees of RP will be fixed by the CD and borne by it and to the extent ratified by the CoC, shall form part of IRPC.
The CD shall make available to the RP an updated list of outstanding claims, including contingent and future claims. A draft IM (Information Memorandum) will be prepared by the CD based on its books, duly certified by its Chairman/Managing Director/Managing Partner, along with an indemnification that if any claim is omitted by them, they will be personally liable to make such claim good. The IM shall be handed over to the RP on the pre-pack commencement date (PCD).Further, if the CD willfully provides any wrong information or omits to provide material information with respect to any claim, the same shall attract criminal liability.
The RP should constitute the CoC comprising of unrelated FCs (unrelated OCs where the CD does not have any unrelated FC) within seven days of the prepack commencement date (PCD), based on the list of claimants provided by the CD and verified by the RP. The RP shall appoint two registered valuers to determine the ‘fair value’ and ‘liquidation value’ of the CD. He will also conduct the usual due diligence and make applications to the Adjudicating Authority (AA) in respect of avoidance transactions.
The pre-pack should offer two options : (i) without Swiss Challenge but no impairment to rights of OCs and (ii) with Swiss Challenge, with rights of OCs and dissenting FCs subject to the minimum provided under section 30(2)(b) (i.e the amount paid to such creditors in the event of liquidation of the CD under section 53 of the Code). The resolution value does not necessarily have to be higher than the realisable value. There should be no requirement of validation of the resolution value by an experienced person.
The pre-pack shall not end up with liquidation, except when the CoC decides to liquidate the CD with 75% voting share. However, where pre-pack is initiated for pre-default stress or default below the threshold for initiation of CIRP and COVID-19 defaults, there will be no liquidation.
The pre-pack should allow 90 days for submission of the resolution plan to the AA and 30 days thereafter for the AA to approve or reject it. The resolution plan approved by the AA shall be binding on everyone. The successful resolution applicant shall start on a clean slate. The regulatory benefits, as are available for CIRP, shall be available for pre-pack as well.
Public comments to the Report and legal framework of pre-pack have been invited by 22 January 2021. To refer to the Report of the sub-committee dated 31 October 2020 and the MCA notice inviting public comments, dated 8 January 2021, click here.
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