A Critique On the Pre-Pack Paradigm In India

The Insolvency and Bankruptcy Code, 2016 aims at business revival under strict timelines, however, adherence to the adjudicatory timeline prescribed by the Code remains a challenge
A Critique On the Pre-Pack Paradigm In India
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Managing Partner at KS Legal and Associates
3 min read
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Corporate rescue, as a precursor to insolvency resolution, enforcement against or liquidation of a company, is a prominent feature of insolvency laws across the globe. Corporate rescue provides creditors of a stressed debtor company with the tools to formulate a plan to salvage the status of such debtor company and revive the business again. The Insolvency and Bankruptcy Code, 2016 aims at business revival under strict timelines, however, adherence of the adjudicatory timeline prescribed by the Code remains a challenge. While the Code facilitates recovery of dues with minimum losses for creditors, the timely revival of debtor companies is often delayed. Furthermore, other issues exist such as formal engagement of third-party advisers, direct and indirect costs, operational disruptions and loss of goodwill of debtor company, to name a few.

Legal luminaries opine that introduction of pre-packaged insolvency resolution process (pre-packs) with necessary checks and balances could change the course of insolvency resolution in India. The Indian economy is grappling with mounting non-performing assets (NPA) and creditors including banks, financial institutions and other lenders are left high and dry with sluggish recoveries. Pre-packs across jurisdictions are known to plug this wide recovery gap.

Typically, pre-packs are known to combine “the best of both worlds” so that insolvency proceedings cause nominal disruption to debtors company’s operations by combining speedy resolution, cost effectiveness, and value maximization with a focus on business continuity. With most pre-packs having the potential to reduce litigation, due to its consensual and informal nature; its success is subject to the binding effect it has on the debtors, creditors and other stakeholders. However, meticulous studies of pre-packs reveal tailor-made features to suit each jurisdiction and none of these variants can be replicated in India without dovetailing it from the legal framework.

Further, past trends regarding out of court settlement and restructuring schemes indicate little to no success and often end up before courts. Furthermore, private negotiation among stakeholders prior to commencement of formal process, which contribute to advantages of pre-pack, is often a source of distress. Therefore, balancing transparency during the pre-pack process without risking the confidence of creditors, customers and employees may be a challenge.

Another major concern is that pre-packs pay no consideration to the future viability of the new company emerging from a pre-pack sale. The current laws state the legal responsibility of the insolvency practioner towards the creditors of the old business; however long-term interests of stakeholders of the new business should also be taken into account with good intention. Besides, pre-packs also give rise to the concern of ‘serial pre-packing’ where pre-pack is used to avoid loan repayment and perpetuate unviable businesses. The informal process of pre-packs involving private negotiations of high value businesses would only exacerbate the existing problems. Therefore, pre-packs should be designed to enhance transparency in India, although different countries across the world have varying levels of transparency, but usually less than the CIRP. 

In view of the above, corporate rescue and specifically pre-packs would prove useful since liquidation of borrowers seems far from a viable solution to cure the longstanding malaise of NPAs in India. However, its impact at the grassroots level can be gauged only after the meticulous implementation of pre-packaged insolvency resolution process under Insolvency and Bankruptcy Code, 2016. Thus, as creditors await pre-packs, the hope is that legislators succeed in resolving the existing NPA problem and default culture; and not promulgate just another corporate rescue method riddled with implementation ineffectiveness and woes.

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