In May 2020, I wrote on this Blog on whether India should consider introducing pre-packaged insolvencies (‘pre-packs’) into its formal insolvency framework as an additional tool to resolve COVID-19 induced stress. A sub-committee of the Insolvency Law Committee chaired by Dr Sahoo, the Chairperson of the Insolvency and Bankruptcy Board of India, has now published a report proposing a framework for pre-packs under India’s Insolvency and Bankruptcy Code, 2016 (‘IBC’). The report suggests that India’s insolvency ecosystem has matured significantly since the IBC came into effect in December 2016 and is ready to experiment with new forms of insolvency resolution, a need that has also been necessitated by the pandemic-induced economic downturn.
Similar to many other jurisdictions, the Indian Government too has placed a limited suspension on initiating corporate insolvency proceedings under the IBC for defaults that occurred after March 25, 2020 (‘COVID-19 Defaults’), a suspension that will remain in effect until March 31, 2021. However, under the proposed pre-pack framework, pre-packs alone can be initiated for COVID-19 Defaults as well.
The Proposed Pre-Pack Process
As a pre-pack depends significantly on consensus between debtor and creditors, the proposed pre-pack process envisages a far greater role for the corporate debtor than the standard corporate insolvency resolution process (‘CIRP’) under the IBC. An application for a pre-pack can only be initiated by the corporate debtor, though the initiation would also require approval of a simple majority in value of the financial creditors. In contrast to the creditor-in-control and resolution professional-led process for a CIRP, the debtor would remain in possession and control of its business during the pre-pack resolution process. However, important business decisions of the corporate debtor would require approval of the financial creditors. The resolution professional’s role in a pre-pack would be limited to conducting the resolution process. The report has also proposed making the officers of the corporate debtor criminally liable for supplying inaccurate, incomplete or misleading information to stakeholders.
A resolution process under a pre-pack is to be completed within 90 days of admission into the formal insolvency process (as opposed to 330 days for a CIRP), taking into account that much of the groundwork for a resolution would be done before admission. Similar to a CIRP, the approval of a resolution plan would require approval of financial creditors holding 66% in value of the financial debt. However, the threshold is higher if the committee of creditors determines that liquidation of the corporate debtor, rather than resolution, is the most economically feasible solution. Liquidating the corporate debtor at the end of the pre-pack process would require the vote of 75% in value of the financial creditors, highlighting that the primary objective of a pre-pack is resolution, with liquidation being the last resort.
A widespread concern about pre-packs has been whether the compressed and initially confidential nature of the process provides for sufficient transparency and enables value maximization by allowing a wide range of participants to submit bids. Some jurisdictions have provided for the concept of a ‘Swiss challenge’ to mitigate this shortfall, a concept that has been adopted by the sub-committee as well. The report states that the corporate debtor would have the first opportunity to submit the base resolution plan. In case the plan impairs the rights of operational creditors (by requiring them to take a haircut on the amounts owed to them), the process must be laid open to a Swiss challenge where third-party bidders are permitted to submit resolution plans. The promoter too would be given an opportunity to match the third party bid. If, on the other hand, the resolution plan submitted by the corporate debtor provides for payment of all operational creditors’ dues in full, the committee of creditors can proceed with voting on the resolution plan, without invoking the Swiss challenge.
An issue that was debated at length by the sub-committee is whether s 29A of the IBC, which prohibits promoters and their related parties from submitting resolution plans in certain circumstances, should apply to pre-packs as well. The prohibitions under s 29A include persons who might have committed acts of fraud or malfeasance, such as those who have been categorized as wilful defaulters or have had criminal convictions. However, the prohibitions also include circumstances not necessarily related to malfeasance such as s 29A(c), which prohibits a person who has an account (or who is in control of an account) that has been classified as a non-performing asset (‘NPA’) for at least the past one year from submitting a resolution plan. After much debate, the sub-committee has proposed that there should be no relaxations to s 29A (including s 29A(c)) for pre-packs given that s 29A is one of the core provisions on which the IBC and CIRP operate.
Looking Ahead—Advantages and Areas for further Clarification
The recommendation of the sub-committee to introduce pre-packs through an amendment to the IBC is a welcome step in giving stakeholders greater flexibility in implementing resolution plans through the IBC. Pre-packs are a particularly useful tool to provide statutory backing to a resolution which is consensually arrived at between debtor and a majority of the creditors. The flip side of this is that pre-packs only work with the consensus and cooperation of the corporate debtor and may not be conducive to situations where there are disputes between debtor and creditor or if the creditors are highly dispersed or not aligned on the end goal and process. The sub-committee’s report recognizes this characteristic of pre-packs and has, accordingly, placed significant responsibilities on the corporate debtor for initiation and conduct of the pre-pack resolution process.
There remain a few issues with the proposed pre-pack framework that need to be worked out in greater detail either in the amendment to the IBC itself or through subordinate legislation. For example, the sub-committee’s report glosses over the process for submission and verification of claims. While the corporate debtor is required to provide the initial list of claims of all creditors, there would necessarily have to be a process for disputing and verifying such claims as well as for submitting claims that may have been missed out by the corporate debtor. This is particularly critical for operational creditors who would not have been involved in the preparatory phase of the pre-pack process and will require time to consider and submit or dispute their claims.
One final concern is whether the absence of any relaxation of s 29A would significantly limit the pool of corporate debtors who might be willing to undertake pre-packs. A very large number of corporate debtors have accounts that have been classified as NPAs for at least one year, which would make their promoters ineligible under s 29A(c) to submit a resolution plan without first regularizing the account. Given that pre-packs are intended to facilitate consensual resolution and, by their very nature, provide the corporate debtor the first opportunity to present a resolution plan, an exception to the requirements of s 29A(c) (but not to the other prohibitions in s 29A) may be appropriate for pre-packs.
Aparna Ravi is a Delhi-based lawyer and a partner at Samvad Partners. The views expressed here are personal.