Pre Packaged Insolvency Scheme Under Ibc

Presently, the Insolvency and Bankruptcy Code (from now on referred to as IBC) provides a time-bound and market-linked resolution framework. Further, the National Company Law Tribunal (from now on referred to as NCLT) must approve the insolvency resolution. Such an insolvency resolution process is quite time consuming and overburdens the NCLT. In order to introduce the fast track processing of cases, the Government has been considering introducing a pre-packaged insolvency scheme since the beginning of the year 2019. On account of the current outbreak of pandemic COVID-19, the Government has paused the insolvency resolution. However, implementation of a pre-packaged insolvency scheme in such critical conditions will allow quick closure of the pending cases and resultantly boost the economy. The present article tries to explain the concept of pre-packaged insolvency schemes under IBC and covers the advantages and disadvantages of the pre-packaged insolvency scheme.

Understanding the concept of Pre Packaged Insolvency Scheme Under Ibc

Basically, the pre-packaged insolvency scheme is an arrangement wherein the main stakeholders, like shareholders, creditors, and promoters, come together to identify the probable buyer. Once the likely buyer is identified, the main stakeholders will negotiate the terms of the resolution plan. After finalizing the terms of the resolution plan from both the ends, the final resolution plan is to be submitted to the NCLT for formal approval. It should be noted that until approval of the NCLT and completion of the sale transaction, the consideration (if any) received from the probable buyer will be held in an escrow account. Such a pre-packaged resolution plan, so negotiated with the prospective buyer, would already be endorsed by the lender and subsequently put forth for the approval of NCLT. The pre-approval of the lenders would definitely clear much of the requirement of NCLT, resulting in minimum intervention of NCLT in the insolvency resolution process. Concluding thereby, that implementation of the pre-packaged insolvency scheme would undoubtedly bring more efficiency in the insolvency resolution process and will, in turn, have a positive effect on the value maximization of the creditors.

Advantages of pre-packaged insolvency scheme

UK and USA have already adopted the pre-packaged insolvency scheme, while India is still in the planning stage to implement the same. In the adoption phase, it is essential to figure out the advantages of the pre-packaged insolvency scheme, which are emphasized hereunder-

As compared to the normal insolvency scheme, the value of the assets since pre-determined would provide more returns to the creditors.
The company and the creditors already approve the pre-packaged resolution plan, and hence the court (NCLT) involvement will be hugely reduced to a greater extent. It would result in quick finalization of the insolvency resolution plan.
Under the pre-packaged insolvency scheme, there would be a significant reduction in unnecessary pleas filed by the stakeholders to NCLT during the insolvency process.
The professional expenses involved in the insolvency process would also be reduced with the implementation of the pre-packaged insolvency scheme.

Disadvantages of pre-packaged insolvency scheme

The likely disadvantages of pre-packaged insolvency scheme are highlighted hereunder-

The pre-packaged insolvency scheme would not have the shield of moratorium similar to when the case is admitted under section 7 or section 9 of the IBC.
The pre-packaged scheme is more in favor of secured creditors, whereas the operational creditors would not be provided much involved in the negotiation procedure.
Under the pre-packaged scheme, debtors would be in-charge of the insolvency process rather than the insolvency resolution professional. However, the same would against the provisions of section 29A of the Act.

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Frequently Asked Questions

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.