The Insolvency and Bankruptcy code enumerates provision for insolvency
resolution process, bankruptcy, and liquidation process for corporate persons,
personal and corporate guarantors, corporate applicants, and partnership firms.
The code consolidates and incorporates the then existed laws in this regime via
amending the same.
It repealed and superseded several laws; The presidency Towns Insolvency Act,
1909, the Provincial Insolvency Act, 1920, the Sick Industrial Companies Act,
1985, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993,
the Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002, and the Sick Industrial Companies (Special
Provisions) Repeal Act of 2003 are the most prominent examples of laws over
which the IBC superseded. One of the chief reasons for repealing the said laws
was that the IBC endeavored to resolve the conflicts of overlapping laws.
From this statement and from the preamble of the code, it is evident that the
prime motto of IBC is to simplify the entire process of insolvency
resolution/liquidation process. When Pre-packaged Insolvency, presently a
foreign concept, is squeezed into the IBC amidst an extraordinarily out-of-hand
situation - the pandemic, the consequences of the same might turn out not as
expected. This Article will majorly throw light on the conundrums
of Pre-packaged Insolvency.
Pre-packaged Insolvency, as the name suggests, offers a pre-pack
potential insolvents to come up with a restructure plan even prior the company
is in the verge of declaring insolvency.
The pre-packaged Insolvency concept minimizes the unforeseen and misapprehended
state of financial stagnation by providing attempts to foresee the company for
potential loss in the near future. It formulates as a corporate rescue process
in foreign countries, especially United Kingdom and United States. This rescue
process, however, has not founds its way in our country yet.
A formal definition for pre-packaged Insolvency is provided by the Black's Law
Dictionary and here I quote, pre-pack bankruptcy
as, Bankruptcy where the
debtor agrees to terms reducing the time it takes to handle the business at
hand. In a nutshell, this foreign concept means that a company, in anticipation
of insolvency, prepares a restructure plan and the same takes effect as soon as
an administrator takes command. It can also be tagged as an hybrid of
Out-of-Court and Insolvency Resolution Process in India, if it takes effect.
The Crucial Differences Between Insolvency Resolution Process And Pre-Packaged Insolvency:
The point of divergence between Insolvency Resolution Process And Pre-Packaged
Insolvency lies in their procedures and the definition of terms as per the
respective sections under Insolvency and Bankruptcy Code of India. A
pre-packaged insolvency stands distinguished because it involves pre-calculated
It saves up ample time for the corporate debtor and it reduces the burden
on the National Company Law Tribunals and National Company Appellate Law
Tribunals by shouldering and holding the would-be insolvent company and the
creditors of the said company responsible for a restructure plan.
Under Corporate Insolvency resolution process, there are two independent yet
succeeding procedures: 1. Insolvency resolution process and 2. Liquidation. When
a restructure plan could not be reached or the same is not approved either by
the corporate debtor or the authority or if there's any violation with regards
to the Insolvency and Bankruptcy Code of India then the insolvency resolution
process is succeeded by the Liquidation process. In other words, when insolvency
resolution process fails, liquidation process gets geared up.
The general process of insolvency resolution is enumerated below to compare and
contrast it with the pre-packaged insolvency process:
A debt is owed and a default occurs therein
A petition is filed at the respective authority
Moratorium period takes effect
An interim insolvency resolution professional gets appointed
A committee of creditors is formed
An insolvency resolution professional gets appointed (it can either be the
interim insolvency resolution professional or any other person maybe nominated
and the same has to be recommended by the Board.)
A resolution plan is submitted to the committee of creditors by the insolvency
resolution professional. Only if the said resolution plan gets 66% of the voting
shares of committee of creditors, it gets to go for the approval of the
adjudicating authority and if the said contingency is not met then another
resolution plan is to be prepared.
Once, when a resolution plan gets 66% of the voting share of committee of
creditors and the same has been satisfactory to the adjudicating authority then
that plan is set to be executed.
When such a resolution plan is not satisfactory and the same is rejected by the
adjudicating authority, the corporate debtor can move for appeal or liquidation
The above-mentioned process are not necessary when it come to pre-packaged
insolvency. Here, a restructure plan is endorsed by the distressed company and
its creditors, even before the interim resolution professional forms the
committee of creditors and prepares the resolution plan as in the general
process of insolvency resolution.
But once, when a restructure plan is brought forth, the same requires an
administrator or an insolvency resolution professional to take it further and to
get it approved by the respective adjudicating authority. The pre-packaged
insolvency process restricts and limits the possible interventions by the
National Company Law Tribunals which is the same reason why an extension of time
period is sought in some cases of insolvency resolution. When a pre-packaged
insolvency process fails, we have two independent yet succeeding procedures:
- Insolvency resolution process and
In toto, there are three succeeding procedures when we count pre-packaged
insolvency process as well. When the said process does not meet the requirements
of the distressed company, it is mandated to follow the already laid down
procedures under the Insolvency and Bankruptcy Code of India.
The Insolvency resolution process and the pre-packaged insolvency process is
more or less the same when we eliminate the formalities involved in bringing up
a resolution plan also known as the restructure plan. The eliminated formalities
construe to be the crucial differences between insolvency resolution process
and pre-packaged insolvency. Further differences can be illustrated when we
briefly look into the pros and cons of pre-packaged insolvency process.
Pros Of Pre-Packaged Insolvency Process:
The pre-packaged insolvency process has enormous advantages. It reduces half of
the procedures and formalities involved in the regular insolvency resolution
process. It navigates itself to the regular process when it fails. It helps the
company to oversee its plus and minuses. The standard tag-line for business
saying that it is nothing but bundle of risks has been seen to be diluted
because of the pre-packaged insolvency process.
Other advantages are enlisted below:
- It operates as a mechanism for corporate rescue.
- It thrives to restore the deteriorating status of an ongoing business.
- It achieves the principle so mandated by an ongoing concern.
- It promotes entrepreneurship since it reduces the risk of loss in
- It opens door for upcoming laws in this regime.
- It facilitates prompt execution of restructure plans.
- It aligns with the contemporary ever-growing business world.
- It would easily blend with the existing law and enables easy sale and
purchase of assets.
Cons Of Pre-Packaged Insolvency Process:
Although pre-packed insolvency process has quite a few number of advantages, we
mustn't negate the disadvantages in it. Every coin has two sides and both the
sides must be equally evaluated before proceeding to a conclusion. The author
thinks that the the said process does not completely reduce the burden on the
National Company Law Tribunals and National Company Appellate Law Tribunals
because when the it fails, the normal procedure ought to be carried on and when
that is done it becomes an extra burden. In our country, we cannot be certain
that a particular policy or a law will work by just looking into it nuances and
researching the same.
This is so because implementation of a policy requires co-operation from the
roots, from our roots and gaining the same at a short is not feasible. A
proportionate number of businesses in India belong to small and medium scale
industry. Therefore, the small and medium sale corporate persons cannot afford
to test and examine the pre-packaged insolvency, definitely not when a pandemic
is being faced by the world.
The overload on the National Company Law Tribunals and National Company
Appellate Law Tribunals must be reduced and the same is also the need of the
hour for the business people. But, that alone cannot be made the sole reason for
an incomplete resolution process or the pre-packaged insolvency.
The constitution of committee of creditors will itself pose troubles and in the
present scenario, a separate suit for the same may also be initiated. The
secured and unsecured creditors positions differ under the Insolvency and
Bankruptcy Code of India only with respect to the priority in repayment of dues.
That position is not the same under pre-packaged insolvency because the
unsecured creditors do not have a say at all. Since we don't have any law in
this aspect, the imposition of moratorium period is still hazy. The transparency
will also be in question because the committee of creditors is not formed by an
insolvency resolution professional but the existing management.
These disadvantages make the pre-packaged insolvency concept a question mark in
its entirety. But with few recommendations, the pre-pacaged insolvency concept
will have a long way to go in our country. It must be tailored as suitable to
the Indian Economy and the Indian Business Sector.
Pre-packaged insolvency is a corporate rescue concept primarily used in the
United States and United Kingdom since 1980's. The law in United States is far
more enumerative and exhaustive than the law in the United Kingdom. It is only
in the year 2016 we have had a detailed and a consolidated regulation in this
regard. When that is the situation, we cannot afford to take the risk of
implementing an unaltered foreign concept in India.
This is not the right time to experiment. Considering, all the pros of
pre-packaged insolvency, it will indeed be beneficial in executing a speedy
resolution process but our focus should be on both speedy and steady resolution
process. The concept of pre-packaged insolvency can be put to effect when it has
been altered according to the Indian system. Until then, it is pointless to
implement the same.
Written By: Jumanah Kader
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at https://ibbi.gov.in/legal-framework/act/ ( 01 July 2020)
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(16 May 2020)
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(18 May 2016)
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(02 July 2019)
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