What Are Pre-Packs Under IBC – Burning Issues – Free PDF Download

Published On July 30th, 2020 Leave a comment

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The Ministry of Corporate Affairs (MCA) has set up a committee to look into the possibility of including what are called “pre-packs”
Under the current insolvency regime to offer faster insolvency resolution under the Insolvency and Bankruptcy Code (IBC)

What is insolvency and bankruptcy?

Insolvencyis when individuals or companies are unable to repay their outstanding debt.
Bankruptcy is when a court has declared a person or other entity insolvent, having passed appropriate orders to resolve it and protect the rights of the creditors.
It is a legal declaration of one’s inability to pay off debts.

Enacted in 2016, it applies to companies and individuals.
As of 2015, insolvency resolution in India took 4.3 years on an average.
Thus enacted to streamline and speed up the resolution process of failed businesses.
The Code consolidates provisions of previous legislative framework to form a common forum for debtors and creditors of all classes to resolve insolvency.

The code stipulates that the resolution process of a stressed company will have to be completed in a maximum of 270 days.
Enacted in 2016, it applies to companies and individuals.
As of 2015, insolvency resolution in India took 4.3 years on an average.
Thus enacted to streamline and speed up the resolution process of failed businesses.
The Code consolidates provisions of previous legislative framework to form a common forum for debtors and creditors of all classes to resolve insolvency.

In March this year, the government raised the threshold for invoking insolvency under the IBC to
Rs 1 crore from Rs 1 lakh
With a view to prevent triggering of such proceedings against small and medium enterprises

Slow progress in the resolution of distressed companies has been one of the key issues raised by creditors regarding the Corporate Insolvency Resolution Process (CIRP) under the IBC,
With 738 of 2,170 ongoing insolvency resolution processes having already taken more than
270 days at the end of March.

It is an agreement for the resolution of the debt of a distressed company through an agreement between secured creditors and investors instead of a public bidding process.
The process needs to be completed within 90 days so that all stakeholders retain faith in the system.

Faster resolution than the traditional CIRP.
Lower the burden on the NCLTs.
The incumbent management retains control of the company until a final agreement is reached.
The distressed company can continue to operate during the period.

The key drawback of a pre-packaged insolvency resolution is the reduced transparency compared to the CIRP as financial creditors would reach an agreement with a potential investor privately and not through an open bidding process.
Experts said this could lead to stakeholders such as operational creditors raising issues of fair treatment when financial creditors reach agreements to reduce the liabilities of the distressed company.
Also, unlike in the case of a full-fledged CIRP which allows for price discovery,
In the case of a pre-pack the NCLT would only be able to evaluate a resolution plan based on submissions by the creditors and the investor.