Pre-packaged Insolvency Scheme under IBC

The Insolvency and Bankruptcy Code (IBC) offers a structured, time-bound, and market-linked resolution framework. However, the existing insolvency resolution process, which must receive approval from the National Company Law Tribunal (NCLT), is often time-consuming and burdens the NCLT with a significant caseload.

To expedite case processing, the Government has been working on introducing a pre-packaged insolvency scheme since early 2019. Despite the pause in insolvency resolutions due to the COVID-19 pandemic, implementing this scheme could rapidly resolve pending cases, thereby contributing to economic growth.

This article explores the concept of pre-packaged insolvency schemes under IBC and discusses their advantages and potential drawbacks.

Understanding the Concept of Pre-Packaged Insolvency Scheme under IBC

The pre-packaged insolvency scheme allows primary stakeholders, such as shareholders, creditors, and promoters, to collaborate in identifying a prospective buyer. After identifying the potential buyer, stakeholders negotiate the terms of the resolution plan. Once finalized, the resolution plan is submitted to the NCLT for approval.

Until NCLT approval and transaction completion, any consideration from the probable buyer is kept in an escrow account. This pre-packaged plan, already endorsed by the lender, reduces NCLT intervention, enhancing the efficiency of the insolvency resolution process and maximizing creditor value. For more on this process, visit Pre-Packaged Insolvency Scheme under IBC.

Advantages of the Pre-Packaged Insolvency Scheme

The UK and USA have successfully implemented pre-packaged insolvency schemes, while India is still in the preparatory phases. The advantages of adopting this scheme include:

Asset values are predetermined, likely offering higher returns to creditors.
Pre-approved by the company and creditors, reducing the NCLT's involvement and accelerating resolution. Learn about similar processes in the UK and USA through the Pre-Packaged Insolvency Process for MSME.
Diminished unnecessary pleas to NCLT during the process.
Reduction in professional expenses, paving the way for cost-effective resolution procedures.

Disadvantages of the Pre-Packaged Insolvency Scheme

While beneficial, the pre-packaged insolvency scheme also has its disadvantages:

It lacks the moratorium protection available when cases are admitted under Section 7 or Section 9 of the IBC.
Favors secured creditors over operational creditors, limiting their negotiation involvement. For details on how this overlaps with IBC, visit Pre-Packaged Insolvency Resolution Process (PPIRP).
The process grants debtors control instead of insolvency resolution professionals, conflicting with Section 29A of the IBC.

To explore other aspects of insolvency laws in India, check the Debt Relief & Insolvency Laws in India. Also, for broader insights into the corporate insolvency resolution process, refer to the Corporate Insolvency Resolution Process.

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Frequently Asked Questions

Common questions about Pre Packaged Insolvency Scheme Under IBC.

A pre-packaged insolvency scheme is an arrangement where the main stakeholders (shareholders, creditors, and promoters) identify a potential buyer and negotiate the terms of a resolution plan before submitting it to the National Company Law Tribunal (NCLT) for approval. The consideration received from the buyer is held in an escrow account until the NCLT approves the plan and the transaction is completed.

One of the primary advantages is that it can lead to quicker finalization of the insolvency resolution plan as the stakeholders have already negotiated and approved the plan, reducing the NCLT's involvement. Additionally, it can maximize the value of assets for creditors, reduce unnecessary pleas filed with the NCLT, and lower professional expenses associated with the insolvency process.

One disadvantage is that the pre-packaged scheme does not have the protection of a moratorium, unlike cases admitted under sections 7 or 9 of the IBC. Another potential drawback is that the scheme may favor secured creditors more than operational creditors, who may not be as involved in the negotiation process. Additionally, the debtor would be in charge of the insolvency process rather than an insolvency resolution professional, which could conflict with Section 29A of the IBC.

In the regular process, the NCLT must approve the insolvency resolution plan proposed by the resolution professional. In contrast, a pre-packaged scheme involves the stakeholders negotiating and agreeing to the resolution plan beforehand, which is then submitted to the NCLT for formal approval, reducing the tribunal's involvement.

The article mentions that the current insolvency resolution process under the IBC is time-consuming and overburdening the NCLT. The government is considering a pre-packaged insolvency scheme to introduce a faster track for processing cases, which could help clear pending cases more quickly and potentially boost the economy.

By involving the stakeholders in negotiating and agreeing to the resolution plan beforehand, a pre-packaged scheme aims to streamline the insolvency resolution process. It can reduce the NCLT's intervention, minimize unnecessary pleas, and potentially maximize the value of assets for creditors, resulting in a more efficient and value-maximizing insolvency resolution process.

While the stakeholders negotiate and agree to the resolution plan in a pre-packaged scheme, the NCLT still plays a crucial role in formally approving the plan. However, its involvement is expected to be significantly reduced compared to the regular insolvency resolution process, as the plan has already been endorsed by the lenders.

The article suggests that secured creditors may have more involvement in the negotiation process of a pre-packaged scheme, while operational creditors may not be as involved. This could be seen as a potential disadvantage, as operational creditors may have less influence on the resolution plan.

The consideration received from the potential buyer is held in an escrow account until the NCLT approves the resolution plan and the transaction is completed. This ensures that the funds are safeguarded and not released until the necessary approvals and formalities are complete.

According to the article, countries like the United Kingdom and the United States have already adopted pre-packaged insolvency schemes, while India is still in the planning stage of implementing such a scheme under the Insolvency and Bankruptcy Code.