The Insolvency and Bankruptcy Code, 2016 (Code) in India has undoubtedly proved to achieve success. Not solely has the Code drastically diminished the time taken for insolvency decision (from 4.three years to 1.6 years), it has additionally considerably improved restoration charges for collectors (from 26.5 to 71.6 cents on the greenback).
Moreover, the Code’s success has resulted in the National Company Law Tribunals (NCLT) and the National Company Law Appellate Tribunal (NCLAT) being inundated with circumstances. However, unavoidable delays in decision because of the ongoing Covid-19 crisis will definitely improve the stress on the Tribunals, and will thereby jeopardize the features from the Code’s implementation. Though the Central Government is bringing an ordinance to droop contemporary filings underneath the Code for a six-month interval, its affect in easing the Tribunals’ workload by mitigating Covid-19-related monetary stress and selling restructuring outdoors the Code is but to be seen.
While restructuring outdoors the Code is a attainable choice, it wouldn’t provide sure advantages obtainable underneath the Code, such because the moratorium on authorized proceedings and the comfort of/exemption from statutory provisions or approvals.
Further, the result of such restructuring doesn’t have the identical binding impact as decision plans underneath the Code. It due to this fact turns into crucial to contemplate and undertake novel decision mechanisms underneath the Code which may ease the stress on the Tribunals by selling speedy insolvency decision in a method that reduces the Tribunals’ supervisory position.
A pre-packaged insolvency (a pre-pack) is one such novel decision mechanism which has been used extensively in the United States and the United Kingdom for the reason that 1980s. A pre-pack is a pre-planned course of in which a financially distressed firm and its collectors attain an settlement with a purchaser for its sale previous to initiating insolvency proceedings.
This is commonly accomplished with the involvement of an insolvency practitioner who’s subsequently appointed because the administrator/chapter trustee of such firm. The sale takes place on the date of initiation of insolvency proceedings or the appointment of the administrator/chapter trustee, or quickly thereafter, and the sale proceeds are distributed amongst stakeholders in the order of precedence.
Pre-packs keep away from prolonged negotiations with collectors after the graduation of insolvency proceedings, enabling expeditious insolvency decision with minimal involvement of courts and tribunals. Moreover, pre-packs permit pre-emptive decision of misery as they are often organized even earlier than formal defaults have occurred.
A financially distressed firm can proceed its operations through the interval resulting in a formal default, and even thereafter, with out the resultant reputational dangers, enterprise disruptions, or worth erosion.
The Bankruptcy Law Reforms Committee which ready the primary draft of the Code had deliberated on the introduction of pre-packs as a part of the Code. However, the Committee felt that additional session with stakeholders and a separate algorithm governing pre-packs have been required earlier than pre-packs could possibly be launched.
Now that a sturdy jurisprudence has developed underneath the Code, which clearly delineates the roles and duties of varied members and the safeguards for safety of stakeholders, the time is ripe to contemplate and undertake pre-packs. This wouldn’t solely additional scale back the time taken for insolvency decision and allow better worth maximisation, but in addition considerably scale back the burden of Tribunals.
The problem then lies in marrying the pre-pack mechanism with the present decision mechanism underneath the Code, in order that obligatory statutory compliances and safeguards for making certain transparency and safety of stakeholder pursuits usually are not skirted. For this objective, a appropriate set of Regulations should be launched. Just a few pointers observe:
a. The company debtor (previous to the prevalence of a formal default) or monetary creditor(s) holding a sure share of debt (upon the prevalence of a formal default) ought to have the ability to appoint an insolvency skilled to manage the prepack mechanism.
b. The insolvency skilled then constitutes a committee of collectors of the company debtor primarily based on info obtainable with the company debtor.
c. The insolvency skilled invitations bids, skilfully balancing enough advertising and marketing and restricted disclosure to keep away from reputational dangers and lack of employment or buyer confidence.
d. An unbiased valuation train of the company debtor must also be carried out.
e. Once a decision plan is negotiated between the committee of collectors and potential consumers, this plan ought to be authorized by at the very least two-thirds of the committee.
f. Subsequently, the insolvency skilled ought to file the decision plan for the NCLT’s approval inside a specified interval.
g. An in depth disclosure assertion ought to be filed together with the decision plan. It ought to present particulars on the unbiased valuation, the advertising and marketing train, the rationale for utilizing the pre-pack mechanism and the options thought of, and the way the pursuits of all stakeholders have been thought of.
Since the decision plan has the prior approval of the committee of collectors, there ought to be no want for interventions by the NCLT at numerous phases in the decision course of. Once the decision plan is filed earlier than the NCLT, a moratorium underneath the Code could also be imposed pending consideration.
During this era, claims and objections to the decision plan ought to be invited from all collectors of the company debtor. This would be certain that operational and different collectors, who usually are not concerned on the pre-filing stage have a chance to current their objections. After duly listening to such objections and making certain compliance with statutory necessities, the NCLT ought to approve the decision plan.
Pre-pack mechanisms can have a far-reaching affect on company rescue in India. If applied nicely, it will promote early debt restructuring in a method that greatest achieves the Code’s goals.
Dheeraj Nair is Partner and Anjali Anchayil, Senior Associate at J. Sagar Associates.