A huge backlog of cases at National Company Law Tribunal (NCLT) benches have stretched resources and led to delays in resolution of cases. The current Covid-19 crisis has only added to the delays. A pre-pack resolution will help shorten the long-winded court process.
Pre-packaged insolvency resolution, or pre-packs, combines the above approaches to corporate rescue, by providing statutory recognition and protection to workouts that are agreed between parties.
The important aspect is that it is debtor focused and not creditor focused. The pre-pack procedure aims at saving the business, its value, IP value and ensuring business continuity and at the same time works towards bringing the company out of the financial distress it is facing.
HOW PRE-PACK SOLVESTHEISSUE
The pre-pack set up helps in preserving the organizational capital of the corporate debtor as the process helps in facilitating creation of a platform for negotiation between creditors and external financiers. Consequently, the pre-pack can seek to facilitate going concern sale of the business of the corporate debtor at 'fair value' during the insolvency resolution process and not merely break-up 'liquidation value'. Fair value means the estimated realizable value of the assets of the corporate debtor if they were to be exchanged on the insolvency commencement date between a willing buyer and a willing seller in an arm's length transaction. However, liquidation value means the estimated realizable value of the assets of the corporate debtor if the corporate debtor were to be liquidated on the insolvency commencement date.
ADVANTAGES OF PRE-PACKS
Speed: A pre-pack process is generally significantly less time-consuming and expensive than formal proceeding. The speedy disposal of a pre-packaged case reduces the total cost involved in the process and preserves the value of the business which can be crucial for the survival of small businesses.
Confidentiality: As a large part of the process takes place outside the statutory process, the publicity attached to formal proceedings can be avoided to a great extent. The element of confidentiality maximizes the returns for all stakeholders as it prevents value destruction that takes place on the commencement of formal insolvency proceedings. Statutory Sanction: Unlike a purely private restructuring process, pre-packs operate within the fold of the statutory scheme. As a result, the final outcome of a pre-pack is binding on all stakeholders and is not under the threat of subsequent challenges. This certainty increases investor confidence and prevents the threat of non-compliance.
THREE MODES OF PRE-PACKS:
- Pre-packaged insolvency resolution process
- Pre-arranged insolvency resolution process and
- A prearranged sale.
PRE-PACKAGED INSOLVENCY RESOLUTION PROCE
In a pre-packaged insolvency resolution process, a corporate debtor, or a financial creditor to whom a specified percentage of the total outstanding debts of the debtor are owed, may initiate the process by appointing an independent insolvency professional.
PRE-ARRANGED INSOLVENCY RESOLUTION PROCE
In addition to pre-packaged insolvency resolution process, an alternate mode of pre-pack is also being proposed for cases where it may not be feasible for the CoC to approve a plan at the pre-commencement stage.
The insolvency professional would have the same duties during a pre-arranged insolvency resolution process as under a pre-packaged insolvency resolution process.
A third mode of pre-pack is also proposed, specifically for time-sensitive cases where a quick going-concern sale would be the most value-maximising option. In a pre-arranged sale, the insolvency professional would conduct a sale of all or substantially all the assets of the corporate debtor during the pre-commencement stage without requiring the prior approval of creditors.
- https://vidhilegalpolicy.in/wp-content/ uploads/2020/02/Report-on-Pre-PackagedInsolvency-Resolution.pdf
- http://www.glcmumbai.com/lawreview/volume10/ Sanjana%20Rao.pdf
- https://www.mondaq.com/india/ InsolvencyBankruptcyRe-structuring/877106/PrePacks-Save-Financially-Distressed-Companies
- https://www.mondaq.com/india/ insolvencybankruptcy/789240/pre-packagedbankruptcy-government-of-india39s-new-initiative
- https://www.hindustantimes.com/business-news/ government-plans-pre-packaged-ibc-deals-toease-load/story-jz2yjEqNoOZuiGKNwAmrKO.html
Originally published May 2020
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