government-plans-pre-packaged-deals-under-ibc

Context: Owing to COVID-19 pandemic, the pause in bankruptcy resolutions has prompted the government to legislate changes to the insolvency code to fast-track processing of cases where a restructuring plan has been agreed in advance between the company and its creditors.

Background

  • The plan to bring into being pre-packaged IBC has been doing rounds for some time.
    • The MCA had in April last year sought comments on pre-packaged resolutions from interested parties.
  • Also, an 11-member panel, under the Chairmanship of U.K. Sinha, is examining the issue to suggest a suitable framework. 
    • It is examining three modes namely pre-packaged insolvency resolution, pre-arranged insolvency resolution and pre-arranged sale.
  • Globally, the practice of pre-packs was first developed in the US, following the enactment of the Bankruptcy Reform Act of 1978. 
    • Soon after its introduction, it became so popular that in 1993, nearly one-fifth of all public bankruptcies were pre-packaged. 
    • Much like in the US, the practice of pre-packs is widespread in the UK, Netherlands, France and Germany.

State of cases at Bankruptcy Courts

  • Till the end of last year, bankruptcy courts in India admitted 3,254 companies for resolution
    • Out of this, resolution plans have been approved for 190 cases.
    • 246 cases have been closed on appeal or review and liquidation proceedings have begun in 780 cases. 

Significance of Pre-packs

  • Once the changes to the IBC are approved by Parliament, the pre-packaged insolvency procedures (Pre packs)are probably intended to lower the burden of courts and effectively come out with an alternative solution.
    • 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.
  • It will also help reduce uncertainty on whether the stressed assets will draw interest from bidders and even if they do so, whether lenders will accept their bids.

Road Ahead

  • It seems that not everyone is convinced that pre-packaged resolutions are the way to ease the burden on bankruptcy tribunals. 
    • It is being opined that the government needs to  increase the strength of NCLT benches to tackle the growing number of cases as there are provisions in the IBC that allow for quicker resolution of cases.
    • For example, Section 12A that  allows the case to be withdrawn by consent of lenders. 
    • It can be put to use if there are quicker solutions or deals available outside the IBC process after it has been admitted.
    • On the other hand, while a pre-packaged deal increases certainty, it does not necessarily lead to value maximization, which is the core principle of the bankruptcy code.
  • Also, experts are apprehensive that pre-pack may not work in the Indian context as firms are largely promoter-driven
    • Only those bidders who are able to view the company from the promoters eyes will have an advantage. 
    • There is a huge amount of asymmetry in terms of transparency and disclosures with respect to corporate financial reporting.

Promoter driven Firms

  • Corporate Promoter can be defined as a firm or person who undertakes the preliminary work incidental to the formation of a company.
    • It includes promotion, incorporation, and flotation of the company.
    • A promoter also solicits people to invest money in the company, at the time of its formation.
  • A promoter driven company  is one in which the majority of the stake is held by the promoter/person who has established the company and at least one representative of the family of promoters  is involved in the management or administration of the business.
    • For e.g. HCL driven by Shiv Nadar

Pre-Packs /Pre packaged Administration

About

  • Pre-packs is a description for an insolvency regime that involves both formal and informal processes.
    • It is a pre-planned insolvency procedure wherein a company arranges to sell its assets to a buyer prior to filing for insolvency.
    • The distressed company and its creditors negotiate and conclude a plan to restructure the debtor company. 
    • Advisors or insolvency practitioners are engaged to find investors and assist in consulting creditors, negotiating the plan, and seek the support of major creditors and ensure that the plan is legally compliant.
    • Lastly, the agreed upon plan is approved and implemented through the formal process under the insolvency law.
  • In an alternative arrangement, the business or material assets can also be sold to the existing directors/promoters operating under a new company.
    • The director/promoter of a failed business may wish to purchase its assets or business in order to form a new company.

Salient Features of IBC

  1. It applies to both individuals and companies.
  2. Earlier it provided for a 180-270 days period to resolve insolvency but now the deadline of 330 days has been set for completion of the corporate insolvency resolution process (CIRP), including litigation and other judicial processes.
  3. It provides immunity to the debtors from claims of resolution by creditors during this period of resolution.
  4. It provides for a common platform of debtors and creditors of all classes to resolve insolvency.
  5. The Code gives the highest priority to those who have brought interim finance to meet the costs of resolution or liquidation, followed by dues to workers for the past two years and dues to secured creditors in equal priority. 
  6. Employees other than workmen, and unsecured creditors and operational creditors are further down the line in the priority of receiving resolution or liquidation proceeds.

            Source: Mint

Source: Mint

Laws prior to IBC

Some of the insolvency laws which failed to make an impact.

  • Sick Industrial Companies (Special Provisions) Act, 1985 (SICA)
  • The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI)

Source: The Mint