The Insolvency and Bankruptcy code enumerates provision for insolvency resolution process, bankruptcy, and liquidation process for corporate persons, personal and corporate guarantors, corporate applicants, and partnership firms. The code consolidates and incorporates the then existed laws in this regime via amending the same.

It repealed and superseded several laws; The presidency Towns Insolvency Act, 1909, the Provincial Insolvency Act, 1920, the Sick Industrial Companies Act, 1985, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, and the Sick Industrial Companies (Special Provisions) Repeal Act of 2003 are the most prominent examples of laws over which the IBC superseded. One of the chief reasons for repealing the said laws was that the IBC endeavored to resolve the conflicts of overlapping laws.

From this statement and from the preamble of the code, it is evident that the prime motto of IBC is to simplify the entire process of insolvency resolution/liquidation process. When Pre-packaged Insolvency, presently a foreign concept, is squeezed into the IBC amidst an extraordinarily out-of-hand situation - the pandemic, the consequences of the same might turn out not as expected. This Article will majorly throw light on the conundrums of Pre-packaged Insolvency.

Pre-Packaged Insolvency:

Pre-packaged Insolvency, as the name suggests, offers a pre-pack for the potential insolvents to come up with a restructure plan even prior the company is in the verge of declaring insolvency.

The pre-packaged Insolvency concept minimizes the unforeseen and misapprehended state of financial stagnation by providing attempts to foresee the company for potential loss in the near future. It formulates as a corporate rescue process in foreign countries, especially United Kingdom and United States. This rescue process, however, has not founds its way in our country yet.

A formal definition for pre-packaged Insolvency is provided by the Black's Law Dictionary and here I quote, pre-pack bankruptcy as, Bankruptcy where the debtor agrees to terms reducing the time it takes to handle the business at hand. In a nutshell, this foreign concept means that a company, in anticipation of insolvency, prepares a restructure plan and the same takes effect as soon as an administrator takes command. It can also be tagged as an hybrid of Out-of-Court and Insolvency Resolution Process in India, if it takes effect.

The Crucial Differences Between Insolvency Resolution Process And Pre-Packaged Insolvency:

The point of divergence between Insolvency Resolution Process And Pre-Packaged Insolvency lies in their procedures and the definition of terms as per the respective sections under Insolvency and Bankruptcy Code of India. A pre-packaged insolvency stands distinguished because it involves pre-calculated moves.

It saves up ample time for the corporate debtor and it reduces the burden on the National Company Law Tribunals and National Company Appellate Law Tribunals by shouldering and holding the would-be insolvent company and the creditors of the said company responsible for a restructure plan.

Under Corporate Insolvency resolution process, there are two independent yet succeeding procedures: 1. Insolvency resolution process and 2. Liquidation. When a restructure plan could not be reached or the same is not approved either by the corporate debtor or the authority or if there's any violation with regards to the Insolvency and Bankruptcy Code of India then the insolvency resolution process is succeeded by the Liquidation process. In other words, when insolvency resolution process fails, liquidation process gets geared up.

The general process of insolvency resolution is enumerated below to compare and contrast it with the pre-packaged insolvency process:

A debt is owed and a default occurs therein
A petition is filed at the respective authority
Moratorium period takes effect
An interim insolvency resolution professional gets appointed
A committee of creditors is formed
An insolvency resolution professional gets appointed (it can either be the interim insolvency resolution professional or any other person maybe nominated and the same has to be recommended by the Board.)

A resolution plan is submitted to the committee of creditors by the insolvency resolution professional. Only if the said resolution plan gets 66% of the voting shares of committee of creditors, it gets to go for the approval of the adjudicating authority and if the said contingency is not met then another resolution plan is to be prepared.

Once, when a resolution plan gets 66% of the voting share of committee of creditors and the same has been satisfactory to the adjudicating authority then that plan is set to be executed.
When such a resolution plan is not satisfactory and the same is rejected by the adjudicating authority, the corporate debtor can move for appeal or liquidation takes place.

The above-mentioned process are not necessary when it come to pre-packaged insolvency. Here, a restructure plan is endorsed by the distressed company and its creditors, even before the interim resolution professional forms the committee of creditors and prepares the resolution plan as in the general process of insolvency resolution.

But once, when a restructure plan is brought forth, the same requires an administrator or an insolvency resolution professional to take it further and to get it approved by the respective adjudicating authority. The pre-packaged insolvency process restricts and limits the possible interventions by the National Company Law Tribunals which is the same reason why an extension of time period is sought in some cases of insolvency resolution. When a pre-packaged insolvency process fails, we have two independent yet succeeding procedures:

1. Insolvency resolution process and
2. Liquidation.

In toto, there are three succeeding procedures when we count pre-packaged insolvency process as well. When the said process does not meet the requirements of the distressed company, it is mandated to follow the already laid down procedures under the Insolvency and Bankruptcy Code of India.

The Insolvency resolution process and the pre-packaged insolvency process is more or less the same when we eliminate the formalities involved in bringing up a resolution plan also known as the restructure plan. The eliminated formalities construe to be the crucial differences between insolvency resolution process and pre-packaged insolvency. Further differences can be illustrated when we briefly look into the pros and cons of pre-packaged insolvency process.

Pros Of Pre-Packaged Insolvency Process:

The pre-packaged insolvency process has enormous advantages. It reduces half of the procedures and formalities involved in the regular insolvency resolution process. It navigates itself to the regular process when it fails. It helps the company to oversee its plus and minuses. The standard tag-line for business saying that it is nothing but bundle of risks has been seen to be diluted because of the pre-packaged insolvency process.

Other advantages are enlisted below:

1. It operates as a mechanism for corporate rescue.
2. It thrives to restore the deteriorating status of an ongoing business.
3. It achieves the principle so mandated by an ongoing concern.
4. It promotes entrepreneurship since it reduces the risk of loss in entirety.
5. It opens door for upcoming laws in this regime.
6. It facilitates prompt execution of restructure plans.
7. It aligns with the contemporary ever-growing business world.
8. It would easily blend with the existing law and enables easy sale and purchase of assets.

Cons Of Pre-Packaged Insolvency Process:

Although pre-packed insolvency process has quite a few number of advantages, we mustn't negate the disadvantages in it. Every coin has two sides and both the sides must be equally evaluated before proceeding to a conclusion. The author thinks that the the said process does not completely reduce the burden on the National Company Law Tribunals and National Company Appellate Law Tribunals because when the it fails, the normal procedure ought to be carried on and when that is done it becomes an extra burden. In our country, we cannot be certain that a particular policy or a law will work by just looking into it nuances and researching the same.

This is so because implementation of a policy requires co-operation from the roots, from our roots and gaining the same at a short is not feasible. A proportionate number of businesses in India belong to small and medium scale industry. Therefore, the small and medium sale corporate persons cannot afford to test and examine the pre-packaged insolvency, definitely not when a pandemic is being faced by the world.

The overload on the National Company Law Tribunals and National Company Appellate Law Tribunals must be reduced and the same is also the need of the hour for the business people. But, that alone cannot be made the sole reason for an incomplete resolution process or the pre-packaged insolvency.

The constitution of committee of creditors will itself pose troubles and in the present scenario, a separate suit for the same may also be initiated. The secured and unsecured creditors positions differ under the Insolvency and Bankruptcy Code of India only with respect to the priority in repayment of dues.

That position is not the same under pre-packaged insolvency because the unsecured creditors do not have a say at all. Since we don't have any law in this aspect, the imposition of moratorium period is still hazy. The transparency will also be in question because the committee of creditors is not formed by an insolvency resolution professional but the existing management.

These disadvantages make the pre-packaged insolvency concept a question mark in its entirety. But with few recommendations, the pre-pacaged insolvency concept will have a long way to go in our country. It must be tailored as suitable to the Indian Economy and the Indian Business Sector.

Conclusion:
Pre-packaged insolvency is a corporate rescue concept primarily used in the United States and United Kingdom since 1980's. The law in United States is far more enumerative and exhaustive than the law in the United Kingdom. It is only in the year 2016 we have had a detailed and a consolidated regulation in this regard. When that is the situation, we cannot afford to take the risk of implementing an unaltered foreign concept in India.

This is not the right time to experiment. Considering, all the pros of pre-packaged insolvency, it will indeed be beneficial in executing a speedy resolution process but our focus should be on both speedy and steady resolution process. The concept of pre-packaged insolvency can be put to effect when it has been altered according to the Indian system. Until then, it is pointless to implement the same.

References:

1. Insolvency and Bankruptcy Board of India, Legal Framework at https://ibbi.gov.in/legal-framework/act/ ( 01 July 2020)
2. Wikipedia, The Free Encyclopedia, Pre-Packaged Insolvency at https://en.wikipedia.org/wiki/Pre-packaged_insolvency/ (05 July 2020)
3. Black's Law Dictionary, Free Online Legal Dictionary 2nd Ed., The Law Dictionary, at https://thelawdictionary.org/prepackaged-bankruptcy/ (01 July 2020).
4. The Economic Times, Indian Times, Getting a move on: Is it time for pre-packaged insolvency in India? athttps://economictimes.indiatimes.com/small-biz/legal/getting-a-move-on-is-it-time-for-pre-packaged-insolvency-in-india/articleshow/75771588.cms?from=mdr/ (16 May 2020)
5. Mondaq, The Insolvency and Bankruptcy Code, 2016 - Key Highlights at https://www.mondaq.com/india/insolvencybankruptcy/492318/the-insolvency-and-bankruptcy-code-2016--key-highlights/ (18 May 2016)
6. Live Mint, How does the insolvency resolution process work ? at https://www.livemint.com/money/personal-finance/how-does-the-insolvency-resolution-process-work-1562084179866.html/ (02 July 2019)
7. Indian Law Offices, Corporate Insolvency Resolution Procedure, at https://www.indialawoffices.com/knowledge-centre/corporate-insolvency-resolution-procedure/ (01 July 2019)
8. AAA Insolvency, Corporate Insolvency Resolution Process, at https://insolvencyandbankruptcy.in/cirp/ (03 July 2020)
9. VIDHI Centre for Legal Policy, Resolving Insolvency Faster by Recognising Out-of-Court Workouts Under IBC, at https://vidhilegalpolicy.in/2020/02/29/designing-a-framework-for-pre-packaged-insolvency-resolution-in-india-some-ideas-for-reform/ (29 February 2020)
10. Begbies Traynor, Advantages and Disadvantages of a Pre-Pack Administration, at https://www.begbies-traynorgroup.com/articles/rescue-options/what-are-the-advantages-and-disadvantages-of-a-pre-pack-administration/ (31 March 2020)
11. Real Business Rescue, Licensed Insolvency Practitioners, Understanding the Pros of a Pre-Pack Administration at https://www.realbusinessrescue.co.uk/pre-pack-administration/advantages/ (29 January 2020)
12. Mondaq, Challenges and Drawbacks of Pre-packaged Insolvency Deals In IBC, at https://www.mondaq.com/india/insolvencybankruptcy/934186/challenges-and-drawbacks-of-pre-packaged-deals-in-ibc/ (05 May 2020)

Written By: Jumanah Kader, Sastra Deemed University