Summary Report of the Sub-Committee of the Insolvency Law Committee on Prepackaged Insolvency Resolution Process
By EDITORIAL TEAM INSOL India Posted On : March 15, 2021
A Pre-Packaged Insolvency or Bankruptcy Scheme has been drafted by the Sub-Committee on Prepackaged Insolvency Resolution Process headed by Venkata Subbarao Kalva. Section 10A of the Code has prohibited the initiation of CIRP in respect of defaults arising due to COVID-19 related reasons at any point in time whatsoever. Therefore, if pre-pack insolvency is not made available in respect of COVID-19 related defaults, such defaults would never be resolved under the Code. The Report has advised that pre-packs (which is a consensual process) be extended to COVID-19 related defaults as well. It also provides for an extensive plan for each stage of the pre-pack insolvency which is initiated from the time of default till the resolution of distress and also for distinguished phases which have been aligned on the basis of the extent of default.
Regarding initiation, the sub-committee recommended that a pre-pack proceeding and a CIRP should not run in parallel. Thus, a Corporate Debtor undergoing CIRP will not have any recourse to pre-pack insolvency and vice versa. The pre-pack insolvency process envisaged by the sub-committee requires completion of several tasks before submission of an application to the AA for initiation of pre-pack insolvency resolution process (including conduction of board meetings and shareholders meetings by the corporate debtor approving the proposal to initiate pre-pack insolvency, approval of the pre-pack insolvency by majority of unrelated financial creditors, identification of an IP to act as a resolution professional, preparation and updation of records and information, preparation of resolution plan, etc). The sub-committee has also recommended that the law should specify requirements for making an application to the AA but not the manner of complying with these requirements so as to ensure ease of operation.
The sub-committee has recommended the ‘Debtor-in-Possession’ model for pre-packs since such a model makes the process simpler and ensures quicker closure while also helping the corporate debtor operate at optimal levels during the resolution process. The committee of creditors may have the liberty to close the process with 66% of those who are present and voting if the corporate debtor engages in any activity which has the potential to cause depletion of assets or value to the detriment of creditors. The committee of creditors has also been empowered to liquidate the corporate debtor at any time during the pre-pack resolution process with 75% of the votes of those who are present and voting.
%u200BIn a pre-pack resolution, the management of the corporate debtor does not shift to an interim resolution professional and then a resolution professional. In a pre-pack resolution process, the resolution professional does not have the responsibility of running the business of the corporate debtor as a going concern. He/she does not take possession and custody of assets of the corporate debtor and is not responsible for protecting and preserving their value. The sub-committee has recommended that the resolution professional should ensure transparency and fairness of the pre-pack process, safeguard the interests of stakeholders during the pre-pack process, the business of the corporate debtor and ensure compliance with the law in so far as the pre-pack process is concerned.
Regarding initiation, the sub-committee recommended that a pre-pack proceeding and a CIRP should not run in parallel. Thus, a Corporate Debtor undergoing CIRP will not have any recourse to pre-pack insolvency and vice versa. The pre-pack insolvency process envisaged by the sub-committee requires completion of several tasks before submission of an application to the AA for initiation of pre-pack insolvency resolution process (including conduction of board meetings and shareholders meetings by the corporate debtor approving the proposal to initiate pre-pack insolvency, approval of the pre-pack insolvency by majority of unrelated financial creditors, identification of an IP to act as a resolution professional, preparation and updation of records and information, preparation of resolution plan, etc). The sub-committee has also recommended that the law should specify requirements for making an application to the AA but not the manner of complying with these requirements so as to ensure ease of operation.
The sub-committee has recommended the ‘Debtor-in-Possession’ model for pre-packs since such a model makes the process simpler and ensures quicker closure while also helping the corporate debtor operate at optimal levels during the resolution process. The committee of creditors may have the liberty to close the process with 66% of those who are present and voting if the corporate debtor engages in any activity which has the potential to cause depletion of assets or value to the detriment of creditors. The committee of creditors has also been empowered to liquidate the corporate debtor at any time during the pre-pack resolution process with 75% of the votes of those who are present and voting.
%u200BIn a pre-pack resolution, the management of the corporate debtor does not shift to an interim resolution professional and then a resolution professional. In a pre-pack resolution process, the resolution professional does not have the responsibility of running the business of the corporate debtor as a going concern. He/she does not take possession and custody of assets of the corporate debtor and is not responsible for protecting and preserving their value. The sub-committee has recommended that the resolution professional should ensure transparency and fairness of the pre-pack process, safeguard the interests of stakeholders during the pre-pack process, the business of the corporate debtor and ensure compliance with the law in so far as the pre-pack process is concerned.