What can be done?

Pre-Packaged of Insolvency could be the way to reduce the Excessive

Litigation.

Pre-Packaged of Insolvency:

Pre-packaged bankruptcy is an increasingly popular means of restructuring distressed firms (Out-

of-court debt restructuring). A pre-packaged bankruptcy calls for a firm to negotiate a reorganization
plan with its creditors, and possibly solicit acceptances of the plan, prior to filing for
bankruptcy.1 The firm then files a plan of reorganization. Given the advance negotiation with
creditors, a confirmation hearing can be scheduled quickly, leading to a quick exit from
bankruptcy. For example, in 2017, Vodka Maker Roust Corp, filed for Chapter 11 of the US
Bankruptcy Code, and it took just four business days to get a plan approved. The company was
stung by the sharp fall in Russian rouble in 2016 and spent nine months hammering out a pre-
packaged bankruptcy plan with note-holders to cut 462 million dollar in debt.2 So it is confer
that, it allows a company to spend as little time in bankruptcy as possible, as almost all the
restructuring negotiations have taken place prior to the bankruptcy filing.

Advantages of opting for a Pre-packaged Insolvency:

For parties in interest, a pre-packaged bankruptcy has several key advantages:-

(i) Outside of bankruptcy, indentures and credit agreements typically require unanimous written
agreement of note-holders or lenders to implement a transaction that affects the fundamental
economics of a deal, Example, changes to the coupon, maturity, principal and other economic
terms. Because all holders must approve these changes, holdouts or non-responsive parties can
frustrate the process.3 In Chapter 11 of the US Bankruptcy Code, plan process, the bankruptcy code
allows for a class of creditors to make binding changes to all aspects of an indenture or credit
agreement if the affected class of creditors accepts the proposed treatment by two-thirds in
dollar value and one-half in number of creditors voting.4

(ii) For a debtor, when the filling is made, the debtor will have the opportunity to broadcast a
strong positive message to its constituencies, which can indicate that the debtor will be more

1 Brian L. Betker, An Empirical Examination of Pre-packaged Bankruptcy, 24 Financial Management. 1, 3-18 (1995).
2 Tom Hals, Ever-shorter U.S. bankruptcies have creditors scrambling, Reuters, (March 20, 2019, 15:52 Pm),
https://www.reuters.com/article/us-usa-bankruptcy/ever-shorter-u-s-bankruptcies-have-creditors-scrambling-
idUSKBN15G5FO.
3 Jose M. Garrido (herein after refer as Garrido), Out-of-Court Debt Restructuring 10, (World Bank 2012).
4 US Bankruptcy Code, Chapter 11.
competitive in the business because it is anticipated that it will have a more manageable capital
structure in the immediate future.5

(iii) Pre-packaged also helps to the employees of the insolvent business transfer to the successor
business without any delay and without losing their jobs.6

(iv) The goodwill of the company does not diminish in value which again potentially results in a
higher price being achieved than would be otherwise realized.7

(v) A debtor can obtain bankruptcy court approval of a disclosure statement because it is not
required for a pre-packaged bankruptcy solicitation because the solicitation is done outside of
bankruptcy.8

(vi) If debtor interested in continuing to run your business as a new company but need help
dealing with on-going financial problems, pre-pack administration could be the best solution
available.9

(vii) The most important advantages to a pre-packaged are savings of time and money. Credit
goes to expedited schedule, fees and costs associated with monthly reports, attorneys, other
professionals, and creditor committees are minimized.10

On the other side, Prepackaged Insolvency is a controversial tool which has some of the
following potential disadvantages:

(i) Part of negotiating with creditors in advance of filing a bankruptcy petition naturally involves
notifying creditors that a company is about to file for bankruptcy protection. For companies
relying on credit, a tightening of credit could put them over the edge more quickly than
anticipated.11

(ii) Candidates for pre-packaged are distressed companies with a relatively small pool of
creditors, and those creditors will ideally be organized and capable of negotiation. Potential
debtors that have a large number of contingent or un-liquidated liabilities are not good

5 Alexandra Kastrinou and Stef Vullings, No Evil is Without Good: A Comparative Analysis of Pre‐pack Sales in the
UK and the Netherlands, 27 International Insolvency Review 320, 320-339 (2018).
6 Admin, The 5 Biggest Advantages of Pre-pack Administration, HJS Recovery (December 26, 2018),

https://www.hjsrecovery.co.uk/the-5-biggest-advantages-of-pre-pack-administration/.
7 Garrido, Supra at 14 at 09.
8 Raza Khan, UK: Pre-Packaged Insolvency, Mondaq (December 26, 2018),

http://www.mondaq.com/uk/x/665912/Insolvency+Bankruptcy/PrePackaged+Insolvency.
9 Garrido, Supra at 14 at 8.
10 Kasee Sparks Heisterhagen, Pros and cons of the pre-pack bankruptcy, Lexology (December 26, 2018),

https://www.lexology.com/library/detail.aspx?g=f927e4b4-ef28-4714-9a04-0a49bb327f80.
11 Id.
candidates for pre-packs as the potential claims have not been valued on the front end of the
plan.12

(iii) A pre-pack bankruptcy is also not ideal for debtors that rely on trade credit. Creditors faced
with pre-pack bankruptcies should be mindful of the proposed petition date and aware of how
that date will affect the nature of the debt and their relationship with the debtor going forward. 13

(iv) There is a perceived lack of transparency with regards marketing and evaluation which can
give rise to the impression that full value may not have been obtained -particularly in the case of
a sale to a party connected with the directors.14

(v) Pre-packaged plans are not a feasible approach if the company will not be either reinstating
or paying in full pre-petition trade, lease rejection, employee or union claims.15

(vi) A pre-packaged bankruptcy proceedings also brings with it a major threat, though. If a
creditor, either operational or financial, had idea that bankruptcy filing is imminent; it may take
an aggressive stance in collecting dues from the company before the commencement of
corporate insolvency resolution process (CIRP). This tough pose may upset the intended
cooperative nature of pre-packaged bankruptcy negotiations. Others may follow suit, causing
more financial stress on the company.16

(vii) In many legal systems, creditors could face liability if it is found that through the
implementation of the workout they were de-facto running the debtor’s business (shadow
directors). They may also face lender liability for the concession of abusive credit. 17 But in a
formal insolvency scenario, those risks do not exist, because new finance typically requires the
consent of creditors and/or authorization of the National Company Law Tribunal (NCLT).

Important Consideration for a Pre-Packaged Bankruptcy:

There are two important considerations, for a company considering a pre-packaged bankruptcy:

12 Id.
13 Raza Khan, UK: Pre-Packaged Insolvency, Mondaq (December 26, 2018),
http://www.mondaq.com/uk/x/665912/Insolvency+Bankruptcy/PrePackaged+Insolvency.
14 Alexandra Kastrinou and Stef Vullings, No Evil is Without Good: A Comparative Analysis of Pre‐pack Sales in

the UK and the Netherlands, 27 International Insolvency Review 320, 320-336 (2018).
15 Admin, Advantages & Disadvantages of a Pre-Pack Administration, Begbies Traynor (December 26, 2018),

https://www.begbies-traynorgroup.com/articles/rescue-options/what-are-the-advantages-and-disadvantages-of-a-
pre-pack-administration.
16 Will Kenton, Pre-package Bankruptcy, Investopedia (December 26, 2018),

https://www.investopedia.com/terms/p/prepackagedbankruptcy.asp.
17 Garrido, Supra at 14 at 13.
(i) After the admission of insolvency petition under Section 7 or Section 9,18 an automatic stay i.e.
under Section 14 of the Code, moratorium will come into effect, which prevents creditors from
enforcing remedies against the corporate debtor and its assets. Further, no specific order of a
court is required to obtain the stay. The automatic stay / moratorium, prohibits the
commencement or continuation of all pending proceedings or suits against the corporate debtor
that could have been or were commenced prior to the commencement of corporate insolvency
resolutions process (CIRP), that includes execution of existing decree / judgement and any lien
against debtor’s property or any act to obtain possession of property of the corporate debtor. As
such, the existence of moratorium is powerful protection for the debtor, which pushes creditors
into a single, organized proceeding, allowing the debtor to focus its efforts on a coordinated and
holistic restructuring. However, in a pre-packaged bankruptcy, during the time when the
company formulates, negotiates and documents the proposed plan, the company does not have
the protection afforded by the moratorium, which means that the creditors can enforce remedies
against the company and its assets at any time outside the insolvency process. 19 For example,
before the proceeding of a bankruptcy case, a creditor can seek to obtain a judgement on a claim
against the debtor and attach assets, etc… To avoid and mitigate any such possibility, the
corporate debtor will need to communicate regularly with its creditors, maintain its credibility
during this period and monitor potential circumstances that could upset the pre-filing of the
existing state of affairs.20

(ii) For most companies facing an impending corporate insolvency resolutions process (CIRP),
including a pre-packaged bankruptcy case, lenders of capital are not likely to lend to the
company. Because an out of court, pre-packaged process takes at least several weeks, if not
several months, to put into force, one of the critical questions for the company and its advisors
to consider is whether the company has enough liquidity for the duration of the pre-filling
period.21

Key Countries practicing Pre-Packaged Insolvency:

18 Insolvency and Bankruptcy Code, 2016, § 7 & 9, Acts of Parliament, 2016 (India).
19 Brian L. Betker, An Empirical Examination of Pre-packaged Bankruptcy, 24 Financial Management. 1, 3-18
(1995).
20 Admin, A Pre Pack Administration process is a powerful tool which facilitates the sale of an insolvent business to

existing directors, a trade buyer or a third party, Begbies Traynor (Feb. 06, 2019), https://www.begbies-
traynorgroup.com/pre-pack-administration.

21Yashika Sarvaria, Computation of Time-Period of Corporate Insolvency Resolution Process, Mondaq (Feb. 07,
2019),
http://www.mondaq.com/india/x/713806/Insolvency+Bankruptcy/Computation+Of+Time+Period+Of+Corpo
rate+Insolvency+Resolution+Process.
The UK (prepackaged have become popular since the Enterprise Act 2002)22 and the US (pre-
packs are often used in a Chapter 11)23 have historically been perceived as leading jurisdictions in
the development of restructuring and insolvency law – to the extent that dozens of local
insolvency regimes around the world have been modelled on some combination of their
processes. Both regimes are highly sophisticated, and feature well-developed legislation
supported by decades of case law that offers both debtors and creditors alike a degree of
certainty and predictability that is not always available in other jurisdictions.

22 Enterprise Act 2002, Part 10: §248-272.

23 US Bankruptcy Code, Chapter 11.