Pre-Package Insolvency Resolution: A Feasible Option?
Silky Kumari National, Student, University of Study and Research in Law, Ranchi
At its core, regulation is nothing but the freedom to do business. The Central Government has been diligently trying to make India a better place to do business. Deep economic reforms are carried out to avoid worker mistreatment by greedy employers and ensure protection to one’s investments. With the enactment of the IBC in 2016, the government has shown its intentions to rescue business in stress and increase competition and innovation in the marketplace. The IBC with its enforcement created a buzz in the country as it laid the way for restructuring, diminishing debt-burdened corporate institutions. Consequently, India’s rank uplifted from 136 to 52 in terms of ‘resolving insolvency’ in the last three years in the World Bank Group’s Doing Business Reports and in the Global Innovation Index, India’s rank improved from 111 in 2017 to 47 in 2020 in ‘Ease of Resolving Insolvency’. With the reorganization procedure available under IBC, 2016, companies have operative tools to reinstate financial viability, and creditors have availability of effective instruments to successfully negotiate and have high possibilities to retrogress the loan at the end of insolvency proceedings.
The Bankruptcy committee in its report highlighting the significance of a smooth and time-bound recovery process opined that “the most important objective in designing a legal framework for dealing with firm failure is the need for speed”. No doubt the Insolvency and Bankruptcy Code has helped companies in its revival and faster liquidation. Importantly it has reduced the time line of recovery from decades to a few years at the most. But at the same time it cannot be ignored that the process is time consuming and expensive given the direct and indirect costs involved. The SC in its recent judgement of Kridhan Infrastructure Pvt. Ltd. v. Venkestesan Sankaranarayan & Others, emphasized on the importance of timelines in the resolution process. The Court opined that the resolution of corporate insolvency could not suffer from an indefinite delay in complete abeyance of the fixed timelines. The framework of IBC has provided statutory timeline of 330 days by inserting a provision under S.12(3). However, the average time taken in successful resolution is 394 days and this delay adversely affects the interest of all the stakeholders. Out of total 3312 cases which have been admitted under IBC, 780 have resulted into liquidation while 1961 are still under CIRP. Which shows even after having such an effective recovery system, liquidation of companies is a prevalent practice. The RBI though has prescribed out of the court debt restructuring mechanism, this option lacks the legal subsistence that the procedure under IBC has and the practical aspect become quite challenging in such scenario.
Pre-Package Insolvency Resolution
Given the difficulties faced, there is a need of a hybrid procedure, that can fasten the benefits of an informal workout—which are speedy, economic, and flexible processes—with the statutory protection that is granted to formal proceedings. A pre-packaged insolvency resolution process is one such mechanism, where the resolution plan is prepared and finalised preceding to the onset of formal proceedings. It basically is a quasi-formal procedure which integrates the essence of an out of court private restructuring between the secured creditors and investors instead of a public binding process.
The IBC was enacted to resolve India’s ever growing impaired assets within limited time period. There is no debate about it that due to large number of backlog cases, NCLT have stretched resources and led to prolonging resolution proceedings. Moreover, due to severe impact of COVID-19 on the economy these cases are only going to surge at high rates. Delays in resolution can give rise to serious damages to the going concern value of the debtor by notably impacting the realisable value of its assets. Along with delays the formal resolution process involves lofty amount of direct and indirect costs. With the availability of an out of court proceedings many such costs which are associated with the Corporate Insolvency Resolution Process(CRIP) can be decreased. This will also ensure accessibility to flexible mechanisms that can provide “tailor-made’ solutions. However the past has evidences to show that a complete out of court process is not as successful as needed for revival. Mainly the cause was the provision of regulatory forbearance on asset classification, which exempted participating lenders from classifying their stressed assets as nonperforming loans. This created a culture of ‘pretend and extend’ among the lenders. Therefore, a comprehensive and efficient insolvency law is one of the pre-requisites for the triumph of informal workouts. The rationale behind a pre-package resolution plan is to regulate and simplify the resolution process and reduce amount of money incurred in bankruptcy protection. For this idea to work firstly an independent insolvency professional should be appointed. Such a professional should invite strategies from prospective resolution applicant, which should also include promoter of corporate debtor, and then adequately measure the market before choosing the plan. All this needs to be done at the pre-commencement stage which will also help the promoters to cooperate with the creditors at an early stage of distress. After the submission of plans, the insolvency professional should call upon the Committee of Creditors (“CoC”) to approve a plan which will ensure dual check on the viability of the plan. The plan is “negotiated, circulated to creditors, and voted on before the case is filed.
Advantages & Concerns
A pre-pack plan certainly is a mechanism to, maximize value by “blending efficiency, speed, cost, and flexibility of workouts with the statutory regulation and structure of formal insolvency procedures. Despite its merits it is not free from criticism.
The foremost advantage of the process is, less time-consuming and cheaper than formal proceedings, as the resolution is negotiated and agreed before commencing the statutory resolution proceedings. This results into making the entry and exit swifter from a CIRP as the creditors and debtors already have a reorganisation plan in hand. In the present case companies or creditors have to approach a bankruptcy tribunal to ascertain the way forward for the defaulting company. The latter gets protection for a maximum of 270 days but sometimes to save viable companies from liquidation, NCLT excludes the time lost in litigation from 270 days available for parties to assent on a plan that can save them. Under the pre-packaged scheme, the case would reach the bankruptcy court after the parties have agreed on a scheme so that it gets enforceable as soon as possible.
Carrying out business during insolvency could be a challenging task to attend if there is no funding available, or it’s too complex to adhere with the regulatory requirements. For a corporate debtor, the admission of the CIRP may be disruptive to key constituencies. Therefore before initiating a CIRP under s.7 or 9 of the Code, the debtor by formulating and obtaining a binding support in the favour of the plan faces relatively less uncertainty and disruption. Consequently allowing the business to be continuous and competitive.
A corporate debtor is often impeded by holdouts or non-responsive parties when implementing changes. As outside of bankruptcy, indentures and credit agreements require unanimous written agreement of lenders, failing which parties are likely to frustrate the process. However this can be avoided if the debtor is working in sync with the COC through Pre-packaged resolution scheme.
The social stigma associated with insolvency is another evil. Information related to insolvency proceedings of a company if came out in the market, will impact negatively on the value of assets of the plummets, irrespective of the economic value of the assets. In pre-packaged framework, the plan of revival of the company is drawn up in a very secret way, this confidentiality preserves the reputation along with the going concern value of the company.
Since the process is quite confidential and receives only the approval of secured creditors, so there is always a prospect that the unsecured creditors will be left high and dry. Given this, the value due to unsecured creditors may be captured by other stakeholders or related parties of management. This would be like a back door to promoters of a company, which otherwise the Code proscribes under s.29A. This could essentially proliferate bad businesses as connected parties would be taking over the business resulting into no genuine restructuring.
There is a probability of ‘phoenixing’. Which means that the companies which are not really insolvent, but just technically insolvent and are allowed to run down to the point of winding up, and then through pre-package are revived, come up again from ashes of the previous company, with near-identical persons managing the new company, under a very similar name.
The insolvency practitioner has no legal requirement to look at the future viability of the new business emerging from a pre-pack sale. His/her only legal responsibility is to the creditors of the old business.
At the moment, the Government of India is contemplating the concept by studying the successful and unsuccessful cases that have taken place in developed economies. The rationale behind the idea is to prevent delays and mitigate cost consumed and providing legal sanctity at the same time, which is removing the shine out of an otherwise robust insolvency regime in terms of IBC, 2016. The concept is rather simple to understand but the evil lies in details to be taken care, prior to the enactment of the plan. Since, the Code does not propose a pre-packaged insolvency resolution process, this framework cannot be executed without amending the Code and the rules and regulations prescribed under it. One of the most important distinction between CIRP and a pre-pack is the investor support that a pre-pack could certainly enjoy. Because of the characteristics which it carries, a pre-pack has to have a very high level of assistance from its stakeholders, thereby securing the highest chances of revival of the company.
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