India Proposes Pre-Packaged Insolvency Resolution Option
Packaged Lego Duplo toy bricks fall from a conveyor belt on the assembly line at the Lego A/S plant, in Nyiregyhaza, Hungary. Photographer: Akos Stiller/Bloomberg

India Proposes Pre-Packaged Insolvency Resolution Option

India has proposed a pre-packaged insolvency option that will allow creditors and debtors to work on an informal plan and then submit it for approval even as the nation braces for a spike in bankruptcies once the freeze on filings is lifted.

The Ministry of Corporate Affairs has invited comments on the proposal that, if accepted, will become part of the Insolvency and Bankruptcy Code, 2016, according to a statement. A sub-committee that suggested the option has recommended to quickly amend the code, preferably by an ordinance, to implement it.

The aim, the proposal says, is to aid the existing insolvency framework and cut the cost and time of the resolution process. While there is no specific statutory definition, a pre-packaged will allow the creditor and the debtor to informally work on a resolution without the involvement of a court or a tribunal. The plan, if the parties agree, can be presented to the adjudicating authority for approval. It's a hybrid of the informal and formal insolvency process and can be applied even before a default.

Experts in the past have batted for such a process citing a high caseload at tribunals and time taken to complete insolvency resolution. The proposal comes when fresh bankruptcy filings remain suspended during the pandemic protect firms facing distress because of Covid-19.

The sub-committee of the Insolvency Law Committee, set up in June 2020 to recommend a detailed scheme for its implementation, has, among other things, suggested:

  • The IBC Code may make a skeletal provision enabling pre-pack, while the informal part could be left to market practice or guided by self-regulation, guidelines, best practices, etc.
  • Pre-pack should be available for all corporate debtors and for any stress—pre and post default.
  • It may begin by being allowed for defaults from Rs 1 lakh to Rs 1 crore and Covid-19 defaults. This can be followed by defaults above Rs 1 crore, and then defaults from Re 1 to Rs 1 lakh
  • A corporate debtor (the company that has defaulted on debt) shall initiate pre-pack with the consent of a simple majority of unrelated financial creditors and shareholders.
  • The moratorium shall be available from the pre-pack commencement date till the closure of the process, whether by approval of the resolution plan or otherwise.
  • The corporate debtor shall remain under the control and possession of the current promoters and management during the pre-pack process.
  • There shall be no dilution of provisions of section 29A (defining the eligibility of a resolution applicant) in respect of resolution applicants for submission of the resolution plan.
  • Pre-pack shall not end up with liquidation, except when the committee of creditors decides to liquidate the corporate debtor with a 75% voting share.
  • Regulatory benefits available to insolvency process shall be available to pre-pack.
  • Pre-pack should allow 90 days for market participants to submit the resolution plan to the adjudicating authority, which shall have 30 days to approve the plan.

The last date for the online submission of comments and suggestions is Jan. 22.

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