PRE-PACK INSOLVENCY RESOLUTION PROCESS: A CRITICAL ANALYSIS

INTRODUCTION

Since the implementation of the provisions of the Insolvency and Bankruptcy Code, 2016
(“Code”), it has been noted that, in the future, after the initial surge of cases filed under the
Code had dissipated and the balance in the creditor-debtor relationship had been restored in
the background of the Code. There would be a "need for marrying" between the Code's
legislative framework for resolving corporate insolvency and the Reserve Bank of India's
("RBI") programmes for out-of-court debt restructuring processes. 1 Both analytical and
anecdotal data suggests that the Code has rebalanced the debtor-creditor relationship to a
great extent and is resulting toward more responsible decision-making by both borrowers and
creditors, which is promoting a substantial number of out-of-court workouts.2

However, because the workouts' outcomes do not have the same legal sanctity as resolution
plans under the Code, there are some doubts regarding their long-term legitimacy. Second,
due to the lack of legal certainty, many sorts of workouts are not being considered at all
(albeit their efficiency benefits for all concerned parties).

We believe that hybrid processes are needed to combine the benefits of informal workouts—
which are defined as quick, cost-effective, and flexible methods—with the legislative
protection afforded to formal proceedings. One such technique is a pre-packaged or pre-
arranged insolvency resolution procedure ("pre-packs"), in which the resolution plan is
established and finalised prior to the initiation of official proceedings.

This paper discusses about pre-packaged insolvency resolution process. While the
recommendations are based on similar processes in other jurisdictions, they have been
tailored to the Indian context, taking into account the Code's specific features as well as other
factors.

A corporate debtor or a financial creditor due a predetermined proportion of the debtor's total
outstanding obligations may launch a pre-packaged insolvency resolution process by

1
Arun Jaitley, ‘Speech by Shri Arun Jaitley, Hon’ble Union Minister of Finance and Corporate Affairs at the
Conference on ‘Insolvency and Bankruptcy Code, 2016: A Roadmap for the Next Two Years’ at New Delhi on
18th December, 2018’ (2018).
2
See Anup Roy, ‘Fearing Insolvency Proceedings, Promoters Line up to Pay Their Dues’ Business Standard
(Mumbai, 4 July 2018).
employing an independent insolvency practitioner. It's worth noting that in our suggestions,
the debtor can only submit a pre-package before a default.

The insolvency professional should undertake the pre-packaged insolvency resolution process
in accordance with the Code's purposes and with the goal of maximising the value of the
corporate debtor's assets. If there is proof of misbehaviour on the side of an insolvency
professional, she will be held accountable ex post to ensure openness and responsibility.

During the pre-commencement stage, the insolvency professional should ask probable
resolution applicants to submit plans and adopt appropriate marketing steps to make sure that
the resolution plan with the best available consideration is filed.

In this context, it is advocated that current corporate debtor promoters be allowed to submit
resolution plans in order to encourage them to engage with creditors early in the distress
process.

Following the filing of plans, the insolvency professional should request approval from the
Committee of Creditors ("CoC"). Following that, the insolvency professional should file the
approved resolution plan with the Adjudicating Authority, along with any other relevant
papers proving the procedural actions done during the pre-commencement stage. Following
that, a public statement would be made identifying the contents of the pre-packaged
bankruptcy resolution process and the proposed plan, giving any impacted stakeholder the
option to object to the proposed pre-packaged plan. To provide procedural predictability, the
Adjudicating Authority should only consider objections that are entirely linked to the
insolvency professional's procedure, and should ignore any challenge to her commercial
conclusions. The Adjudicating Authority may approve the plan after considering any
stakeholder objections.

To improve speed and certainty, it is suggested that if the Adjudicating Authority fails to
accept or disapprove a pre-pack plan within a set amount of time following the date of filing,
the plan should be presumed authorised by the Adjudicating Authority. Finally, if a thorough
claims gathering process is not possible during the pre-commencement stage, the claims
collection process may begin after the public announcement. Because the resolution applicant
would not be able to allocate the plan consideration among several classes of claimants in this
situation, the plan proceeds should be dispersed according to Section 53 of the Code's
liquidation waterfall.
PRE-PACK INSOLVENCY PROCESS IN INDIA

History and Background –

The Code was enacted in order to offer a prompt and effective method for resolving India's
ever-increasing quantity of stressed assets. The Bankruptcy Law Reforms Committee
("BLRC Report"), highlighting the significance of a quick and time-bound resolution
procedure, stated that "the most important objective in developing a legal framework for
dealing with corporate collapse is the requirement for speed." 3 The Code establishes severe
deadlines for completing CIRP: if a corporate debtor is not resolved within these deadlines, it
will be forced to liquidate. Certain times, such as those spent in court processes, have been
exempted from the Code's statutory time limits due to judicial interpretation. 4 As a result, the
time it takes to complete CIRP frequently exceeds the timeframe set forth in the Code.
According to data accessible through December 2019, it took an average of 394 days to
effectively resolve 190 cases, which is much longer than the current time limit of 330 days
set by the Code.5 Delays in resolution can have a major negative impact on the debtor's going
concern value by lowering the realisable worth of its assets. 6 In addition to delays, formal
insolvency proceedings incur additional direct and indirect costs. Payment of court fees and
engagement with third-party consultants such as lawyers and accountants are examples of
direct costs.7 The indirect expenses include those incurred as a result of business disruption,
such as those incurred as a result of counterparties' refusal to continue their association with
the debtor, loss of goodwill, and so on.8 Some of the above-mentioned costs of CIRP under
the Code may be reduced through an out-of-court restructuring process. A private
restructuring mechanism is not bound by any statutory procedure because it is an informal,

3
Ministry of Finance, The Report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design
(2015) Executive Summary, http://ibbi.gov.in/BLRCReportVol104112015.pdf
4
Committee of Creditors of Essar Steel India Limited Through Authorised Signatory v. Satish Kumar Gupta &
Ors, Civil Appeal Nos. 8766-67 of 2019.
5
Insolvency and Bankruptcy Board of India, Insolvency and Bankruptcy News (The Quarterly Newsletter of the
Insolvency and Bankruptcy Board of India, Vol. 13, 2019),
http://ibbi.gov.in/uploads/publication/62a9cc46d6a96690e4c8a3c9ee3ab862.pdf
6
Pratik Datta, ‘Value Destruction and Wealth Transfer under the Insolvency and Bankruptcy Code, 2016’,
(2018) NIPFP Working Paper No. 247.
7
1 Lemma W. Senbet and Tracy Yue Wang, ‘Corporate Financial Distress and Bankruptcy: A Survey’ (2010) 5(4)
Foundations and Trends in Finance.
8
2 Stuart Gilson, Kose John and Larry H.P. Lang, ‘Troubled Debt Restructurings: An Empirical Study of Private
Reorganization of Firms in Default’, (1990) 27 Journal of Financial Economics 315-353.
out-of-court process, making it a flexible tool that can deliver "tailor-made" solutions. 9
Because an out-of-court settlement does not have to adhere to statutory deadlines, parties can
perform a thorough due diligence investigation, reducing the risk of ex post arguments over
the kind of information given or the method of valuation used. 10 Furthermore, informal
workout conversations are often private and discreet, allowing the parties to openly bargain
without acquiring the stigma of insolvency. However, in India, entirely out-of-court
restructuring approaches have not shown to be very effective. For example, the RBI
established a Corporate Debt Restructuring (“CDR”) mechanism in 2001 to institutionalise a
voluntary and out-of-court restructuring method for stressed debt resolution.

However, according to one research of 114 firms that were referred to the CDR process,
firms' financial hardship worsened after being referred to the CDR procedure, and banks
tended to extend larger amounts in favour of enterprises that were significantly worse off. 11
The CDR plan had been referred to the CDR procedure for stressed assets worth over INR 4
trillion at the time it was withdrawn by the RBI in 2018. However, only INR 84,677 crores in
loans were effectively restructured, while approximately INR 1.84 trillion in debts exited the
CDR process without result.12 The offer of regulatory deferment on asset classification, which
freed participating lenders from classifying their stressed assets as nonperforming loans, was
one of the key causes of the CDR process' failure. 13 This resulted in a culture of ‘pretend and
extend' among lenders, who began the CDR procedure solely to avoid a negative
classification of their loans, rather than attempting to properly settle them. To prevent abuse
of the CDR process, the RBI rolled back the regulatory forbearance provision in 2015 and
subsequently formulated a revised framework for corporate distress resolution, in which
distressed firm lenders were required to form a ‘Joint Lenders' Forum' to explore a
‘Corrective Action Plan.'14 Following that, RBI introduced a scheme for ‘Strategic Debt
Restructuring' (later modified as the ‘Scheme for Sustainable Structuring of Stressed Assets'),

9
Jan Adriaanse, Restructuring in the Shadow of the Law: Informal Reorganisation in the Netherlands, (2005),
https://scholarlypublications.universiteitleiden.nl/handle/1887/9755.
10
Committee of Creditors of Amtek Auto Ltd. through Corporation Bank v. Mr. Dinkar T. Venkatasubramanian
& Ors., Company Appeal (AT) (Insolvency) No. 219 of 2019.
11
Rajeswari Sengupta & Anjali Sharma, ‘Bank Financing of Stressed Firms,
https://www.ideasforindia.in/topics/money-finance/bank-financing-of-stressed-firms.html.
12
8 Gopika Gopakumar, ‘RBI Moves to Wind up CDR System’,
https://www.livemint.com/Industry/k2S0MIBwJ1Imv7x6PXPxSJ/RBI-moves-to-wind-up-CDR-system.html.
13
e Nilesh M Kharche ‘An Overview of Corporate Debt Restructuring’ (2016), https://taxguru.in/company-
law/overview-corporate-debt-restructuring-cdr.html.
14
2 Reserve Bank of India, Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair
Recovery for Lenders: Framework for Revitalising Distressed Assets in the Economy (2014),
https://rbidocs.rbi.org.in/rdocs/content/pdfs/NPA300114RFF.pdf.
which gave power to lenders to take over a debtor's controlling stake as part of the
restructuring package, in order to remove delinquent promoters from the management of
defaulting debtors.15

Despite the RBI's several attempts, such schemes have failed to provide a reliable framework
for addressing financial distress. One possible explanation is that these out-of-court schemes
worked in the context of a fragmented insolvency legal environment, which resulted in
"parallel processes, conflicts between different statutes, and uncertainty for creditors
concerning their recovery."16 One of the prerequisites for the success of informal workouts is
a broad and effective insolvency law. In the absence of such a law, promoters of defaulting
firms had little incentive to cooperate with creditors in good faith and promptly comply with
restructuring packages. Furthermore, because they were non-statutory and voluntary, they
faced the risk of dissident creditors jeopardising the negotiating process by filing legal action
against the borrower.17

Following the implementation of the Code, which was largely viewed as an effective legal
regime that might boost out-of-court processes, RBI withdrew all previous debt restructuring
programmes.18 To comply with the Code's scheme, the RBI devised a new scheme for
resolving financial distress that could operate in the shadow of the Code's legal structure.
Anecdotal information suggests that the presence of a strong legal framework has encouraged
defaulting promoters to behave responsibly because they are afraid of losing control of their
firms.19 The Code has also helped borrowers adopt greater corporate governance standards by
imposing personal liability on directors for improper trading and banning promoters from
participation in the CIRP.20 Significantly, studies indicate that the Code has been successful
in persuading delinquent debtors to pay their existing debts voluntarily. Despite this, there is
no legal recognition of voluntary debt restructuring plans (other than schemes of
arrangement). As a result, any party to a restructured contract struck between a debtor and its
15
Anand Adhikari, ‘Why RBI’s Strategic Debt Restructuring Scheme has Turned out to be a Damp Squib’
Business Today, https://www.businesstoday.in/latest/story/rbi-one-size-fits-all-strategic-debt-restructuring-
scheme-is-turning-out-to-be-a-damp-squib-74495-2017-01-17.
16
Aparna Ravi, ‘The Indian Insolvency Regime in Practice-An Analysis of Insolvency and Debt Recovery
Proceedings’ (2015) Vol. 50, Issue No. 51 Economic & Political Weekly 46, 52.
17
Anant Khandelwal, ‘The phenomenon of corporate debt restructuring in India: How far can it go to prevent
insolvency?’ (2015), https://www.insol-europe.org/uploads/files/documents/Eurofenix_58_Final.pdf.
18
Swiss Ribbons Pvt. Ltd. & Anr. v Union of India & Ors.
19
; Ajay Shah, ‘How the IBC Changes the Game’ Business Standard, https://www.business-
standard.com/article/opinion/how-ibc-changes-the-game-118123100024_1.html.
20
U. K. Sinha et al, ‘Frontiers of Corporate Governance –an Aid to Insolvency Framework’ (2019) Insolvency
and Bankruptcy Code: A Miscellany of Perspectives, https://www.ibbi.gov.in/uploads/whatsnew/2019-10-11-
191223-exc18-2456194a119394217a926e595b537437.pdf.
creditors has the potential to back out. Furthermore, unlike a resolution plan approved under
the Code, there is no possibility of the debtor being placed into liquidation if the restructured
debt agreement's requirements are not met.

Furthermore, the regulatory and statutory exemptions afforded to a CIRP under the Code do
not apply to such a process. The lack of availability of certain regulatory exemptions, for
example, was one of the reasons for Jet Airways' out-of-court resolution procedure failing.
Even before the default, the ailing airline's management had begun conversations with Etihad
Airways, which had expressed interest in boosting its interests in the airline subject to certain
conditions. One of the pre-conditions was that Etihad Airways be excused from having to
make an open offer under the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011.21 Etihad Airways' deal fell through because the lenders were unable to
guarantee such a waiver. If Etihad Airways had made the offer as part of a Code-compliant
resolution plan, it would have been immune from such a requirement.22

As a result, a hybrid framework for corporate rescue is required, one that combines "the
benefits of private restructuring with some of the qualities of the formal procedure". 23 A pre-
pack is a hybrid framework in which a plan for resolving a firm's insolvency is decided in
principle before the company enters a formal insolvency process. The existing management
plays a vital part in the process because the discussions are in the pre-commencement stage.
They are motivated to file for bankruptcy at the earliest possible stage of a default since
creditors frequently agree to keep the current management.

What is a Pre-Pack?

In a pre-pack, "a struggling company and its creditors reach a deal ahead of statutory
administration proceedings" that "allows statutory procedures to be conducted at the quickest
possible pace."24

Following the passage of the Bankruptcy Reform Act of 1978, pre-packs became popular in
the United States. It became so widespread soon after its inception that roughly one-fifth of

21
Shrimi Choudhary, ‘SEBI Cloud on Etihad Open Offer Waiver For Jet Airways Shareholders’ Business Standard,
https://wap.business-standard.com/article-amp/companies/sebi-cloud-on-etihad-open-offer-waiver-for-jet-
airways-shareholders-119021200028_1.html.
22
4 Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations,
2011, Regulation 10(1) (da).
23
Bo Xie, Comparative Insolvency Law: The Pre-pack Approach in Corporate Rescue (Edward Elgar Publishing,
2016) 28.
24
Vanessa Finch, Corporate Insolvency Law Perspectives and Principles (2nd edn, Cambridge University Press
2009) 453.
all public bankruptcies were pre-packaged in 1993.25 A pre-pack is essentially the filing of a
reorganisation plan alongside the bankruptcy petition. Before the case is filed, the plan is
"negotiated, circulated to creditors, and voted on."26 However, in certain circumstances, while
the plan is written and presented to creditors before to the bankruptcy filing to seek their in-
principal approval, the formal voting procedure occurs after the bankruptcy filing. This is
referred to as a "pre-planned" resolution method. The proposal must be approved by the
Court in both types of processes. Furthermore, the US Bankruptcy Code allows a debtor to
sell all or substantially all of its assets before a reorganisation plan is confirmed if there is
adequate "business rationale." These asset sales are known as "pre-plan sales," and typically
take a lot less time than traditional bankruptcy proceedings to complete.27

Pre-packs are widely used in the UK, just as they are in the United States. In the United
Kingdom, a pre-packaged administration entails "a negotiated sale of the distressed business,
to be carried out promptly following the formal appointment of the administrator."28
Importantly, the administrator, who is a court officer29, has the authority to carry out the
transaction without first seeking the statutory consent of creditors.30 Following the success of
pre-packs in the United States and the United Kingdom, many other countries, including the
Netherlands, France, and Germany, have implemented comparable pre-pack structures.31

Advantages of Pre-Packs

If a pre-pack is implemented, it can boost value by “combining the efficiency, speed, cost,
and flexibility of workouts with the binding effect and structure of formal bankruptcy
proceedings.”32 Because it will entail out-of-court settlement plan negotiations, but the
accepted resolution plan will obtain the Adjudicating Authority's sanction under the Code. In
some jurisdictions, there is proof that the speed and minimization of established processes in
pre-packs result in better recoveries for at least some creditors. 33 This is complemented with
25
Id.
26
John D. Ayer et al, ‘Out-of-court Workouts Prepacks and Pre-arranged Cases A Primer’, (2005 April) ABI
Journal, https://www.abi.org/abi-journal/out-of-court-workouts-prepacks-and-pre-arranged-cases-a-primer.
27
American Bankruptcy Institute, Final Report of the ABI Commission to Study the Reform of Chapter 11
(2014), Pg. 83-87.
28
A. Kastrinou and S. Vullings, ‘No Evil is Without Good’: A Comparative Analysis of Pre-pack Sales in the UK
and the Netherlands’, (2018) 27(3) International Insolvency Review 320, 321.
29
Insolvency Act, 1986, Schedule B1, Para 5.
30
Re T&D Industries plc [2000] BCC 956.
31
Bo Xie, Comparative Insolvency Law: The Pre-pack Approach in Corporate Rescue (Edward Elgar Publishing,
2016), Chapter 7
32
Jose M. Garrido, Out-of-Court Debt Restructuring (World Bank Study 2012), para 101,
33
S. Frisby, ‘A Preliminary Analysis of Pre-Packaged Administrations (Report to the Association of Business
Recovery Professionals)’ (2007) R3 – The Association of Business Recovery Professionals,
employee retention rates that are greater during pre-packs than during regular business
hours.34

The following are some of the elements of pre-packs that help to increase value:

Speed: Because the resolution is negotiated and agreed upon before commencing the
statutory resolution framework, a pre-pack process is often less time-consuming and less
expensive than formal proceedings.35 The quick resolution of a pre-packaged case lowers the
total cost of the process,36 which is important for small businesses that can't afford the costs
of a prolonged insolvency,37 as well as maximising value, as described above.

Confidentiality: One of the most important characteristics of a pre-pack sale in some

jurisdictions, such as the United Kingdom, is its confidentiality. This feature of
confidentiality prevents the destruction of value that occurs when bankruptcy is declared, and
it is perhaps one of the most important advantages of pre-packs versus formal processes,
since it can help to preserve the company's going-concern value.38

Sanction of appropriate authority under the statute: A pre-pack works within the fold of
the particular statute, which makes the end result binding on all stakeholders, unlike other
types of out-of-court restructuring proceedings. The pre-pack plan, for example, must be
confirmed by the court under Chapter 11 of the United States Code (“US Bankruptcy Code”),
after which it becomes binding on all parties involved. Similarly, in order to be effective, pre-
plan transactions under the US Bankruptcy Code require the Court's approval. As a result,
unlike an informal exercise scheme, a pre-packaged plan is binding on all parties involved
and is rarely challenged after it has been approved. This assurance boosts investor confidence
and eliminates the risk of non-compliance. Furthermore, the exemptions that apply to a plan
approved under the statutory system, such as exemptions from securities law requirements,
apply to a pre-pack plan as well, providing greater assurance about the plan's implementation.

In India, the need for a prepack procedure is becoming more apparent. The government has
admitted that the Code may aid in "cutting litigation costs and delays" and "decongesting the

https://www.iiiglobal.org/sites/default/files/sandrafrisbyprelim.pdf.
34
Id.
35
Supra note 24.
36
Rodrigo Olivares-Caminal et al, Debt Restructuring, (1st edn, Oxford University Press 2011), para 3.129.
37
Supra note 33.
38
Teresa Graham, ‘Graham Review into Pre-pack Administration: Report to The Rt Hon Vince Cable MP’ (2014),
para 7.7.
overburdened NCLTs" upon its enactment.39 Furthermore, by formally recognising their
conclusions under the statute, a prepack process would provide greater clarity to the debt
restructuring processes notified by the RBI.

Criticism regarding Pre-Packs –

Despite the advantages of pre-packs, it is crucial to note that pre-packs especially in UK are
subject to various criticism. The same are as follows:

Capture of value by other stakeholders: There is a criticism that, because the process is
often confidential and receives mainly secured creditors' approval, there is insufficient
incentive to do extensive marketing that would benefit all creditors, particularly unsecured
creditors.40 As a result, other stakeholders may be able to seize the value due to unsecured
creditors.41 When the pre-pack leads in a sale to parties who are associated or related to the
debtor, the danger of value being captured is heightened. 42 In these circumstances, linked
parties may be able to capture the value owing to unsecured creditors, while existing
management regains control without having to carry the burden of repaying most of the
company's prior debts. This image is heightened by the fact that the pre-pack arrangement is
discussed and drafted while the company's current management remains on board.
Furthermore, while a bankruptcy practitioner finally completes a prepack arrangement,
concerns have been expressed that valuations and marketing activities are just check-boxing
exercises for the insolvency practitioner.43

Proliferation of bad business:

There is fear that in circumstances when linked parties purchase the bankrupt's business
through a pre-pack sale, the lack of transparency may result in the perpetuation of "bad
businesses" rather than allowing for a meaningful restructuring or exit of the debtor.

There are also concerns that pre-packs are being exploited by linked parties to gain from the
re-engineering of the balance sheet, particularly to undermine their business rivals, where the
business is just technically insolvent and not genuinely insolvent. However, there is evidence
that some of these complaints are exaggerated. For example, according to Andrea Polo's
39
Ministry of Corporate Affairs, Government of India, Monthly Newsletter (Vol. 13Z, November 2018,
www.mca.gov.in/Ministry/pdf/NovemberMCANewsletter_19122019.pdf.
40
Supra note 38.
41
Supra note 33.
42
Supra note 38.
43
Vanessa Finch, Corporate Insolvency Law Perspectives and Principles (2nd edn, Cambridge University Press
2009) 74.
research, unsecured creditor recovery is not worse in pre-packs, including connected party
pre-packs, than in other bankruptcy procedures. In reality, the research shows that related
party sales were used primarily by small businesses in areas where personnel, reputation, and
intangibles play a larger role. Due to their size and type of assets, such corporations would
not survive a public administration procedure and would have to be liquidated, resulting in a
huge loss of value. Given this, the pre-pack procedure is more likely to have benefited these
companies and their unsecured creditors than any other mechanism.44

Furthermore, because these critiques are mostly directed at the conduct of pre-packs in the
United Kingdom, it is vital to remember that the financial markets in the United Kingdom
and India are vastly different. Firms in the United Kingdom, unlike in India, have highly
concentrated debt structures. Furthermore, whereas promoter-driven enterprises are common
in India, corporate ownership in the United Kingdom is often described as "widely
dispersed."45

Because of these changes, the considerations raised above may not be fully applicable in
India. Furthermore, because these concerns stem primarily from the confidential nature of
pre-packs, as well as the unique nature of administration proceedings in the United Kingdom
- where a business sale can be executed with the consent of secured creditors alone -
appropriate safeguards can be built into the proposed framework to ensure that the aspect of
confidentiality does not supersede the goal of value maximization.

RECOMMENDATIONS FOR AN INDIAN FRAMEWORK FOR PRE-PACKED

INSOLVENCY RESOLUTION

In Pre-packaged insolvency resolution process, an insolvency professional will be hired to

supervise the process and ensure its procedural integrity. Prior to filing, resolution plans will
be invited, negotiated, and finalised.  PPIRP refers to situations in which the CoC votes on
and accepts a negotiated and finalised settlement plan prior to the start of formal proceedings.
Thus, Pre-packaged insolvency resolution process will be favoured in cases when the CoC
consists of a small group of financial creditors with a high degree of interest uniformity,
allowing the statutory criterion for approving a resolution plan to be met during the pre-
commencement stage.

44
K. van Zweiten, Principles of Corporate Insolvency Law (5th edn, Sweet & Maxwell 2018), 495.
45
John Armour, Brian R. Cheffins, and David A. Skeel, Jr., ‘Corporate Ownership Structure and the Evolution of
Bankruptcy Law: Lessons from the United Kingdom’, (2003) 55 Vanderbilt Law Review1699,
https://scholarship.law.vanderbilt.edu/cgi/viewcontent.cgi?article=1809&context=vlr.
Establishment of the Committee of Creditors and the appointment of an insolvency
professional –

The selection of a certified insolvency practitioner should be the first step in starting the
PPIRP. As long as the corporate debtor has not defaulted on its obligations, the insolvency
professional might be chosen by the existing management. This would encourage promoters
and managers to communicate with their creditors early in the default process. Alternatively,
any financial creditor owing a certain percentage of the debtor's outstanding debts might hire
the insolvency professional. Howsoever, to avoid undue intervention by creditors, creditors
should only be allowed to commence PPIRP once an event of default has occurred.

An insolvency professional who has been thus appointed should be qualified to serve as a
resolution professional for a corporate debtor's CIRP.46 Furthermore, the insolvency
professional should declare her relationship with the corporate debtor, financial creditors,
prospective resolution applicants, and the professionals nominated by her upon appointment,
according to the method outlined in the CIRP Code.47

The insolvency professional should assemble the CoC, which is made up of the corporate
debtor's financial creditors, as soon as he or she is appointed. However, in circumstances
where the corporate debtor has many financial creditors with varying histories, this may not
be possible. In such instances, the PAIRP, as mentioned later, may be used.

Duties of Insolvency Professional –

The major responsibility of the insolvency professional should be to guarantee that the Code's
goals are met during the pre-filing period, and that the pre-pack process maximises the value
of the debtor's assets in the best interests of all creditors. The insolvency professional should
not only assure that the resolution process is not in violation of the Code's stated objectives,
but also that it is not in violation of any of the Code's provisions, except those that may not
apply to a pre-packaged insolvency procedure. The insolvency expert should evaluate the
company's financial situation and write an information memorandum for potential resolution
applicants. In this case, the firm's management and authorities should be compelled to supply
the insolvency expert with all relevant information about the company.
46
e Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons)
Regulations, 2016, Regulation 3.
47
e Insolvency and Bankruptcy Board of India, Disclosures by Insolvency Professionals and other Professionals
appointed by Insolvency Professionals conducting Resolution Processes (IBBI Circular No. IP/005/2018,
https://www.ibbi.gov.in/webadmin/pdf/whatsnew/2018/Jan/Disclosures-Circular-12.01.2018%20(1)-1_2018-
01-16%2018:17:52.pdf.
Making the insolvency professional accountable for not acting in good faith or creating
malfeasance, like in the UK, could be one way to ensure transparency and accountability in
the process. In particular, the insolvency professional should be held accountable for a poor
marketing campaign.

In order to submit resolution plans for the corporate debtor, the insolvency professional
should contact possible resolution applicants. While the insolvency practitioner should keep
the pre-packaged resolution process confidential, he or she should also take proper marketing
measures to ensure that the resolution plan offers the best possible consideration to each
creditor is filed. IBBI may develop basic marketing criteria and guidelines in this regard,
which should serve as a guide for insolvency professionals seeking potential bids for the
company.

Connected Persons’ Eligibility as Resolution Applicants –

It is proposed that promoters and other linked persons of the corporate debtor be allowed to
submit resolution plans within the pre-packaged resolution process. Existing promoters of a
corporate debtor may be enticed to engage constructively with its creditors at an initial point
of crisis if this is the case. The present promoters are removed from the firm and are not
authorised to participate in the resolution process once a CIRP is launched under the Code.
Recognizing the risk of losing control of the corporate debtor, existing promoters are likely to
not only work with creditors throughout the PPIRP, but also to offer a plan that they approve.

Furthermore, resolution plans filed by people related to the corporate debtor should be
subjected to additional safeguards. In the instance of connected party pre-packs, for example,
the CoC should be compelled to file a statement with the Adjudicating Authority detailing the
reasons for approving a plan proposed by current management or any of its related partners.
This statement should also emphasise the alternatives that the CoC reviewed and explain how
the adopted plan provides the most value to all creditors.

Another protection could be to submit such plans to an independent body of experts, such as
the UK's "pre-pack pool," before presenting them to the CoC. While mentioning the ‘pre-
pack pool' is optional in the UK, it could be made essential in India if the prospective
resolution applicant is unqualified to submit a plan under the Code. Every resolution
applicant should be required to pay the fees for each referral to the body up front. In addition,
if a corporate debtor falls into financial difficulties soon after the plan is accepted, it may be
barred from participating in another PPIRP.
Minimum requirements to be followed for a Resolution Plan –

In order to protect the interests of all creditors in the PPIRP, the insolvency professional
should guarantee that the value of the accepted resolution plan does not fall below the
corporate debtor's existing enterprise value. Before considering resolution plans, the
insolvency professional should hire independent and qualified valuers to determine the
enterprise value of the corporate debtor. This might prevent the company's current
management from taking over at the expense of the creditors. In addition, the insolvency
professional should create a report on the viability of the suggested resolution plan, which
will be presented to the Adjudicating Authority later.

Voting process for acceptance of a Resolution Plan –

In most cases, the CoC should vote on a plan in the same way that a CIRP would. However,
in circumstances where the CoC is primarily made up of financial creditors authorised by the
RBI, the RBI's current procedure for out-of-court debt resolution may be used to control the
voting process in a CoC. The voting threshold required for adopting resolutions in such
instances, however, should be guided by the relevant sections of the Code, as indicated
below.

Statutory Threshold for accepting Resolution Plans –

The proposed resolution plan should be accepted by the statutory threshold for accepting
resolution plans under the Code, because a pre-packaged resolution plan approved by the
Adjudicating Authority would be assumed to have been approved within the structure of the
Code, despite being negotiated and approved by the CoC prior to commencement. To be
approved by the CoC, a resolution plan must receive the support of 66 percent of the
corporate debtor's financial creditors vote in favour.

Application to the Adjudicating Authority –

Because the Adjudicating Authority is envisioned as the "exclusive forum for firm insolvency
and liquidation adjudication" with the goal of "ensuring that the insolvency or bankruptcy
resolution is performed within the framework laid down by the law," it is proposed that the
Adjudicating Authority be the appropriate body to approve a pre-packaged resolution plan.48

48
Ministry of Finance, The Report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design
(2015) paras 4.2.2., 4.2.
Furthermore, while IBBI has been given some quasi-judicial powers, its jurisdiction is
confined to the entities it regulates.49 As a result, after the CoC approves the resolution plan,
the insolvency professional should file the plan with the Adjudicating Authority, together
with other essential documentation proving the procedural procedures completed in the
PPIRP. If the resolution applicant is a related party, the insolvency professional should also
file the feasibility study described above, as well as the opinion of an independent body of
experts. The insolvency professional should also provide information on the escrow account
where the resolution applicant's consideration is stored for distribution among creditors.

Public Announcement –

Following the application to the Adjudicating Authority, the insolvency professional should
make a public notification disclosing the required information of the PPIRP and the
resolution plan. Any impacted stakeholder should be able to file an application to dispute the
PPIRP following the public announcement. However, such a challenge should be limited to
any procedural errors during the PPIRP and not to the CoC's commercial judgement to
approve the resolution plan. Aside from giving appropriate information to object to the
PPIRP procedure, the public notification should also make the claims collection process for
plan distribution easier. It should serve as a reminder to anyone who owes the corporate
debtor money to make a claim with an insolvency specialist.

Approval by the Adjudicating Authority –

After the insolvency professional files the application, the Adjudicating Authority should
consider any objections from interested parties (if any) and issue an order accepting the
resolution plan. The Adjudicating Authority's duty, like in the CIRP, would be to make sure
that the plan conforms with the Code's standards, rather than to make substantive decisions
about the plan. In any case, the Adjudicating Authority must be perceived to have approved
the plan if it fails to pass any order within a set timeline, in order to provide additional
certainty to the plan proposed under the Pre-Packaged Insolvency Resolution Process and to
ensure that the time taken for approval does not totally undermine the use of the pre-pack
mechanism. Despite the Supreme Court's ruling that mandatory time limits on legal
proceedings are unconstitutional50, it is suggested that a provision for deemed approval of

49
Ministry of Finance, The Report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design
(2015) para 4.1.4.
50
Committee of Creditors of Essar Steel India Limited Through Authorised Signatory v Satish Kumar Gupta &
Ors, Civil Appeal Nos. 8766-67 of 2019.
pre-pack plans be added to ensure that pre-packs are completed quickly and to avoid cases
where a pre-pack plan which has already been approved by the CoC fails to reach finality due
to legal delays. As a result, a necessary concession would be to narrow the timeframe of
appeal from an Adjudicating Authority order approving a plan: the delay and expense of
delaying the plan until appeals are resolved can outweigh the protection afforded by an
appeal right.51 Instead, robust and transparent procedural measures for PPIRP should be
designed to protect the interests of all stakeholders, minimising the possibility for
exploitation by the insolvency professional, current management, or the debtor's creditors.
Additionally, special benches in the Adjudicating Authorities may be established for the
purpose of clearing pre-pack plans within the stipulated time after providing all concerned
parties with a reasonable opportunity to be heard.

Claims, Collection and Distribution –

If the pre-commencement phase is to be kept confidential, an extensive claims collection

process may not be possible before the formal proceedings begin. As a result, after the public
notification has been made, the procedure of collecting claims from all stakeholders with
overdue dues should begin. Furthermore, because the resolution applicant would not be able
to make payments to different classes of creditors under the resolution plan, the plan's
proceeds should be disbursed among different claimants according to the Code's waterfall
mechanism for corporate debtor liquidation, subject to any cut taken by an assenting
creditor.52

PRE-PACKAGED INSOLVENCY PROCESS FOR MSME’S IN INDIA

Economies, businesses, and financial markets all over the world, including India's, have been
adversely damaged by the COVID-19 pandemic. The epidemic has had an impact on the
operations of micro, small, and medium-sized businesses (MSMEs), putting many of them in
financial jeopardy.

Micro, small, and medium businesses are vital to India's economy since they contribute
significantly to the country's gross domestic product and employ a large number of people.
The government has taken a number of steps to alleviate the effects of the pandemic,
including raising the minimum amount of default for triggering the corporate insolvency

51
Nicolaes Tollenaar, Pre-Insolvency Proceedings: A Normative Foundation and Framework, (1st edn, Oxford
University Press 2019) para 8.04.
52
Insolvency and Bankruptcy Code, 2016, Section 53
resolution process (CIRP) to INR one crore and suspending the filing of CIRP applications
for defaults occurring during the year beginning March 25, 2020. The Insolvency and
Bankruptcy Code (Amendment) Ordinance, 2021 was promulgated on April 4, 2021. It
amends the Insolvency and Bankruptcy Code, 2016.

Corporate Insolvency Resolution Process for MSMEs:

Due to the distinctive nature of their enterprises and simplified corporate structures, the
amendment recognized the specific needs of MSMEs in terms of insolvency resolution. The
Code requires that a firm be revived in a timely manner, as any delay will impair the
company's enterprise value. When a company's finances aren't in good shape, protracted
ambiguity regarding its ownership and governance might make settlement seem unlikely.
Both the triggering process and the insolvency resolution process require rigorous respect to
timelines. A CIRP must be completed within 180 days, with a one-time extension of up to 90
days available. The regulations include a model timeline for each job in the 19 process that
must be followed to the letter. During CIRP, the resolution professional (RP) who is
appointed to perform CIRP manages the company's business.

During the pre-packaged insolvency resolution process, the Resolution Professional's

responsibilities and powers are as follows:

The resolution professional's responsibilities include:

1. Confirming the list of claims given by the corporate debtor pursuant to Section 54G of
the Code,
2. Notify your creditors of your claims.
3. Keep a current list of claims.
4. Keep an eye on how the corporate debtor's affairs are being managed.
5. In the case of a breach of any of the Board of Directors' or partners' or corporate
debtor's responsibilities, notify the creditors' committee.
6. Constitute the CoC and attend all of its meetings,
7. Prepare the information memorandum based on the preliminary information
memorandum filed under Code Section 54G.
8. Apply for transaction avoidance under Chapter III of the Code or for fraudulent or
unjust trade under Chapter VI of the Code.

Debtors eligible for Pre-packaged insolvency resolution –

Adequate protections must be put into the framework to guarantee that the process is taken
seriously in order to find a stress resolution and to prevent any potential exploitation. In this
paper, certain protections have been suggested in the proper places. To have reasonable
assurance of resolution, the plan should have buy-in from a particular threshold of its
stakeholders before making an application for pre-pack start. On both sides of the debt,
namely the creditors and the CD, such a barrier should be neither too low nor too high. The
possibility of resolution decreases if it is very low. The process may not take off if it is too
high.

In the case of a corporate debtor who has defaulted, an application for the start of a pre-
packaged insolvency resolution process can be submitted if the following conditions are met:

1. It hasn't gone through a pre-packaged insolvency resolution procedure or finished a

corporate insolvency resolution process in the three years leading up to the initiation
date;
2. It is not in the midst of a corporate insolvency process;
3. Under Section 33 of the Code, no order requiring it to be liquidated has been issued.
4. Under Section 29A of the Code, it is permissible to submit a resolution plan;
5. Financial creditors of the corporate debtor who are not affiliated to it have
recommended the name of an insolvency professional to be appointed as resolution
professional to oversee the corporate debtor's bankruptcy resolution procedure.
6. The financial creditors of the corporate debtor, who are not associated to it, have
authorised such pre-packaged proposal, which represents not less than 66% of the
financial debt payable to such creditors.
7. The majority of the corporate debtor's directors or partners, as the case may be, have
signed a declaration;
8. The members of the corporate debtor have approved a special resolution, or at least
three-fourths of the total number of partners, as the case may be, approving the
submission of an application to begin the pre-packaged insolvency resolution
procedure.

Approval of Financial Creditor –

The Corporate Debtors must obtain the permission of a simple majority of: unrelated
Financial creditors; its shareholders before proceeding with the pre-pack. There will be no
parallel proceedings between the pre-pack and the CIRP. There will be a three-year cooling-
off period in which a pre-pack cannot be started within three years of the completion of
another pre-pack.

Proceedings under PPIP –

The scope of the resolution plan was reviewed in order to provide for the resolution of a
business or an endeavour. However, in light of the existing jurisprudence, it was decided to
stick with the current concept of resolution plan. Any permutation and combination of
measures, as accessible for a CIRP, may be included in the resolution plan. Regulation 37 of
the CIRP Regulations lays out a comprehensive list of steps for resolving a CD's insolvency
in order to maximise asset value.

Section 29A makes it illegal for people with certain disabilities to submit a CIRP resolution
plan. The sub-committee was certain that this provision should not be weakened in the pre-
pack framework's design, since it has been critical in achieving considerable behavioural
change and establishing a fair debtor-creditor relationship. People with a shady past who have
disappointed their employers, employees, lenders, and stakeholders do not deserve a second
opportunity.

Initiation of CIRP after PPIP –

The creditors' committee, at any moment after the pre-packaged insolvency date of
commencement but before the resolution plan is approved by a vote of 66%. If the corporate
debtor is eligible for a corporate bankruptcy resolution process, the holders of a majority of
the voting shares might decide to commence a corporate insolvency resolution procedure on
behalf of the corporate debtor. When the Adjudicating Authority receives notice of the
committee of creditors' judgement from the resolution professional, the Adjudicating
Authority has thirty days to issue an order to:

In the case of the corporate debtor, end the pre-packaged bankruptcy resolution process and
start the corporate insolvency resolution process under Chapter II of the code.

Declare that the pre-packaged insolvency resolution process costs, if any, shall be included as
part of insolvency reorganisation costs; and appoint the resolution professional referred to in
clause (b) of sub-section (1) of section 54E as the interim resolution professional, subject to
submission of written consent by such resolution professional to the Adjudicatory Authority
in such form as may be specified.
Moratorium under PPIP –

The Code's moratorium is a key aspect of insolvency procedures. It provides a peaceful

environment in which to work out a resolution plan while the corporate debtor's operation is
unaffected and its assets are preserved. It's critical to have a similar calm moment during pre-
pack to help with resolution. It should, however, be for a set length of time, with no
extensions allowed to prevent the procedure from being abused. The subcommittee proposes
that the Section 14 moratorium be available from the ‘Pre-pack Commencement Date' until
the process is completed, whether by resolution plan approval or otherwise.

CONCLUSION

Since pre-packs were not foreseen by the Code nor contemplated by any preceding statute,
there is no existing market practise or regulatory experience in India. As a result, the
proposed framework for pre-packs should be brought in over time. The framework may later
be made available to all types of corporate debtors based on industry feedback and issues
encountered during the initial phase. Furthermore, because pre-packs are more common
among small and micro businesses53 and because they tend to have fewer financial creditors, 54
it is posited that the pre-pack framework, which includes PPIRP be enabled first for small
debtors (such as micro and small businesses) or debtors with simple debt structures. Given
that a large portion of a pre-pack would be completed outside of the Adjudicating Authority's
jurisdiction, the insolvency professional will play a critical role in ensuring that the Code's
rules are followed. As a result, IBBI proposes that insolvency experts monitoring pre-packs
be held to a higher level of professional competence.

While the BLRC Report suggested that “speed is of the essence for the working of the
bankruptcy code”55, the Supreme Court stated that “one of the important objectives of the
Code is to bring insolvency law in India under a single unified umbrella with the object of
speeding up the insolvency process.”56 As a result, a framework for pre-packs is being
presented allow for quick resolutions under the Code.

The proposed framework has the potential to significantly reduce the burden on Adjudicating
Authorities under the Code while also resolving financial distress of businesses in a timely

53
6 Teresa Graham, ‘Graham Review into Pre-pack Administration: Report to The Rt Hon Vince Cable MP’
(2014), paras 7.3.
54
Ministry of Finance, Interim Report of The Bankruptcy Law Reforms Committee (2015) para 8.3.
55
Supra note 3.
56
Innoventive Industries Ltd. v ICICI Bank and Ors, A.I.R. 2017 S.C. 4084.
and cost-effective manner. It is important to note, however, that the insolvency professional
will play a critical role in this framework because she will be responsible for balancing the
interests of all stakeholders and ensuring that no stakeholder, particularly promoters and
secured creditors, unjustly enriches themselves by abusing the framework for PPIRP. To
ensure that insolvency professionals carry out their responsibilities independently, their
behaviour should be reviewed on a regular basis, and the IBBI should impose tougher
professional standards for insolvency professionals working on pre-packs.