The Insolvency and Bankruptcy Code (IBC) was enacted in 2016 to solve myriad issues related to reorganizations and bankruptcy procedures, including multiple and inconsistent laws, delays in providing resolution, and a lack of simplified processes. Four years since its implementation, the IBC has made noticeable inroads in providing corporate insolvency resolution processes (CIRPs) to stressed companies: by the end of September 2020, a total of 4,008 CIRPs had been admitted, of which 473 were settled or on appeal/review, 277 were closed by resolution, and 1,025 were closed by liquidation.
Despite achieving a reasonable degree of progress, the IBC is functioning under an ecosystem which is still evolving, and which has already experienced its share of teething troubles. A formal, court-adjudicated regime makes the entire process considerably lengthy and expensive. Most CIRPs are not completed within the stipulated time of 180 days (or 330 days with extensions). The main adjudicating and appellate bodies for insolvencies – the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) – are overburdened with not just high IBC-related caseloads but also with pending cases related to other statues such as the Companies Act.
Against this backdrop, there was a recognition that new initiatives were needed to improve the effectiveness of the IBC. While implementation of formal processes (along with necessary amendments to the Code) are usually time-consuming affairs, it was felt that India needed an informal dispute settlement mechanism to expedite resolutions. In January 2021, a sub-committee of the Insolvency Law Committee (ILC) proposed the introduction of a pre-packaged insolvency resolution process (PPIRP) with “necessary checks and balances” as an alternative mechanism to resolve insolvencies. The sub-committee invited public comments till 22 January 2021.
A pre-packaged insolvency resolution process (pre-packs) is an informal, debtor-initiated restructuring agreement between distressed companies and financial creditors. Once all stakeholders agree to the resolution plan, it can be submitted to the adjudicating authority for approval.
Despite these concerns, pre-packs have the ability to revolutionize insolvency resolutions in India. By incorporating both formal and informal elements, pre-packs can enable faster resolutions in a cost-effective manner.
It is now up to the government to ensure speedy incorporation of pre-pack regulations – even a skeletal framework – by amending the IBC through an ordinance. In its report, the Sahoo panel has noted that pre-packs provide the stakeholders “flexibility in working out a consensual, but efficient, strategy for effective resolution and value maximization that may be difficult under the formal insolvency procedure.” This in itself is a compelling argument to warrant introduction of pre-packs.