New Year, New Resolutions – ILC Sub-Committee Issues Report on Pre-packaged Insolvency Resolution

The (Indian) Insolvency Law Sub-Committee chaired by Mr. Sahoo (Chairman of the Insolvency and Bankruptcy Board of India), along with other advisors and industry participants including our founding partner Mr. Bahram Vakil, issued the Report on Pre-packaged Insolvency Resolution Process, on January 8, 2021, available here (‘Report’). The Report sets out a proposed framework for pre-packaged insolvency resolution in India within the structure of the Insolvency & Bankruptcy Code, 2016 (‘IBC’). Recommendations are invited by January 21, 2021.

•     What is a Pre-packaged Insolvency Resolution Process?

Pre-packaged Insolvency Resolution Process (‘Pre-pack’) is envisaged to be a corporate rescue method that incorporates the virtues of both informal (out-of-court) and formal (judicial) insolvency proceedings. It is intended to enable stakeholders to resolve the stress of a corporate debtor as a going concern, in a faster and more cost efficient manner and with less business disruptions.

•     Key Recommendations from the Pre-Pack Report

Availability
  • Pre-pack should be available for all Corporate Debtors (‘CD’) which should be implemented in a phased manner, for defaults of INR 1 lakh to INR 1 crore and COVID-19 defaults for which corporate insolvency resolution process (‘CIRP’) is not available.
Initiation
  • Unlike CIRP, Pre-pack should be initiated by the CD.
  • To curb Pre-Pack’s misuse, the CD’s default should be within the above threshold.
Tasks prior to Pre-pack
  • Initiation of Prepack should require the consent of simple majority of unrelated financial creditors (‘FC’) or simple majority of shareholders of the CD.
Management of the CD
  • The Sub-Committee preferred a debtor-in-possession with creditor-in-control model for resolution of stress through pre-packs as it incentivises the CD to initiate pre-pack. This will avoid shocks to the operations of the CD associated with a shift from the current management to an independent resolution professional (‘RP’).
  • However, key decisions enumerated under section 28 of the IBC (such as interim finance, creation of security, change in capital structure, etc.), should only be with approval of the committee of creditors (‘CoC’).
RP – Appointment & Role
  • RP to be appointed by CD, with consent of majority unrelated FCs.
  • RP’s role limited to overseeing the process. The RP does not assume management of the CD / run business.
  • RP should ensure that CD is not run in a manner detrimental to the process, ensuring transparency and fairness, safeguarding the interests of stakeholders, business, and ensuring compliances with the law.
Decisions by the CoC
  • Recommended that the CoC should approve / reject a plan, like in CIRP, by 66% majority.
  • Additionally, CoC may also: (i) terminate the process, (ii) liquidate the CD, and (iii) decide matters under section 28, by 66% majority.
  • Threshold for approving liquidation is revised to 75% majority.  All voting (other than regarding liquidation)
    on present and voting basis.
Timeline
  • Maximum of 90 days for submission of plan to the tribunal, and 30 days for approval.
Process
  • Information Memorandum prepared by the CD and certified by Chairman / Managing Director to be handed over to the RP on commencement date.
  • RP should appoint two valuers to assess liquidation and fair value.
  • Moratorium under Section 14 of the IBC should be available till closure of process. Moratorium to not cover essential services.
  • Other safeguards– (i) special granting of moratorium (vs automatic applicability), (ii) early termination on misuse, and (iii) control of CoC for matters under Section 28..
  • For value maximization, the following recommendations are made:
    1. Base resolution plan to be kept ready, possibly by the CD’s management (preferably in consultation with stakeholders), to be placed before the RP in 2-3 days of Pre-pack commencement;
    2. Pre-pack may, then, offer two approaches:
No Swiss Challenge Swiss Challenge
(a) Only if no impairment to operational creditors (‘OCs’) (i.e. pays claims of OCs fully). (a) Rights of OCs and dissenting FCs subject to the minimum currently provided under IBC.
(b) If base plan pays out the dues of OCs fully and the CoC feels that it gives the best value, it may decide to accept the plan. (b) Promoter prepared resolution plan to form base for Swiss Challenge.
(c) If it does not pay the dues of OCs fully, it must conduct a swiss challenge. (c) Details of design and process to be specified under regulations. The design needs to balance the incentives and disincentives to drive value maximisation.
Resolution Applicants
  • Potential resolution applicants for a Pre-pack resolution should meet the requirements as under Section 29A of the IBC
Basic Structure
  • Report suggests starting with the simplest variant of pre-pack, which can be rolled out with the existing ecosystem.
Legal Framework
  • IBC may make skeletal provisions enabling pre-pack via an Ordinance.

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•     Key Takeaways

The Report concludes that a pre-pack insolvency regime with the features mentioned above, if implemented, will be especially beneficial for resolving COVID stress, and specially MSMEs.

Date: January 14, 2021