Pre-packaged Insolvency Resolution Process

GOI vide notice dated 08.01.2021, invited comments from the public on Pre-packaged Insolvency Resolution Process under Insolvency and Bankruptcy Code, 2016. Let’s look into the Salient Features of Proposed Pre-pack vis-à-vis CIRP.

Parameter	CIRP	Proposed Pre-pack
Objective	Resolution through a resolution plan	Resolution through a resolution plan
Legal framework	Relatively more in the statute and less in regulations	Relatively less in the statute and more in regulations
Applicability	Companies and LLPs	Companies and LLPs
Initiation of process	Default above Rs.1 crore excluding COVID-19 Default	Pre and post default stress, including COVID-19 default. In a phased manner, if required
Initiation by	FC, OC, or CD	CD, with consent of majority of unrelated Fcs
Management of the CD	IP-in-possession with creditor-in-control	Debtor-in-possession with creditor-in-control
Role of IP	IRP appointed by the applicant and then RP by the CoC	RP, to be appointed with consent of majority of unrelated Fcs
Role of IP	Managing affairs of the CD and conducting the process	Conducting the process
Claim collation	IRP to invite and collate	CD to provide. RP to verify
Information memorandum	Prepared by RP	Draft prepared by CD and finalised by RP
Moratorium	Moratorium under section 14	Limited Moratorium
Interim finance	Yes	Yes
Avoidance transactions	Yes	Yes
Valuation	By two valuers	By two valuers
IRPC	Includes cost of running operations	Does not include cost of running operations
Invitation for resolution plans	Public process	First right of offer to promoters, Swiss Challenge
Ineligibility for resolution plan	Section 29A to apply	Section 29A to apply
Early closure of process	Under section 12A, on request of the applicant	With approval of 66% of voting share, present and voting; Suo moto by CoC
Approval of resolution plan by CoC	66% of voting share	66% of voting share, present and voting
Consequence of termination of process	No termination allowed	Liquidation, with 75% of voting share of CoC
Consequence of failure of process	Liquidation	Closure
Binding outcome	Resolution plan binding	Resolution plan binding
Regulatory benefits	Yes	Yes
Clean Slate, post resolution	Yes	Yes
Role of IP and AA	Relatively more	Relatively less
Timeline	180 days till approval of resolution plan by the AA	90 days for filing of resolution plan with the AA plus 30 days for the AA to approve it
Cooling off	12 months between two CIRPs	Three years between two Pre-packs

My Comments;

Majority of Insolvencies are due to mismanagement or corrupt practices of the management of the CD. In the present & proposed pre-pack  insolvency regime there is no disincentive for the corrupt management. Pre pack will rather provide premium for corrupt management as debtors will continue to be in management. It will provide a way out to legally evade the liabilities. 

Hon’ble Supreme Court of India, in Swiss Ribbons Pvt. Ltd. & Anr. v. UOI & Ors, while examining the constitutional validity of IBC  had  observed that;

• “The Defaulters’ paradise is lost. In its place, the economy’s rightful position has been regained.”

                                ~ Justice RF Nariman

By permitting the debtors to retain the control of the business during insolvency, we will be going back to the pre IBC era & all advantages of the IBC will be negated. Pre pack or post pack whatever the procedure may be, the debtor should not be in the control of the business. The idea behind pre-packs is to speed up the process. The need of the hour is to strengthen the judicial system to avoid delays. The concept of swiss challenge can be imported in the IBC regime. 

Concepts of pre-pack & debtors in control can only be considered in the case of MSME, where generally resolution applicants are few. 

System should have some disincentive for the promoters in case the company goes into insolvency / liquidation. Least, the promoters can be disqualified from becoming KMP (Key Managerial Person) of a company for the next 5/10 years. 

I am not able to reconcile with the concept of “Cooling off period between two Insolvencies” Every insolvency has its own cost which is borne by the society. It’s taxpayers' money on the one hand and (i) Lower interest on deposits to elderly depositors of the banks (FC’s) (ii) Higher interest cost for efficient businesses. Why should the incompetent managements be given the second/third chance to splurge the public money? Second insolvency, within a certain time frame raises questions, whether earlier resolution of CD was a right decision? Second insolvency within a certain time frame, should result in direct liquidation of CD & permanent disqualification of the promoters/directors. 

PSBs' NPAs accounted for 85 per cent of the NPAs of the banking system in 2013 as compared to 75 percent in 2003. During this period, the PSB's share in total bank credit increased only marginally, from 74 percent to 76 percent.

"The gross non-performing assets of public sector and private sector banks as on September 30, 2017 were Rs 7,33,974 crore, Rs 1,02,808 crore,respectively," the finance ministry said citing RBI data.

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