Pre-Packaged Deals In India– Owing to COVID-19, the Government, in an attempt to mitigate the predicaments of companies, decided to suspend the Insolvency and Bankruptcy Code, 2016 (“IBC”). The subject of suspension of the IBC gained more impetus when clarification was issued on June 5th, 2020, as an ordinance
Section 10A, which essentially suspended the effect of Sections 7, 8, and 10 for a year, was inserted. The Coronavirus crisis has been a catalyst that led to this development, as the rationale was to protect the interests of the Micro, Small, and Medium Enterprises (“MSMEs”). But the point is whether this action would actually benefit the interests of parties or not. One of the prime anticipations in the post-suspension scenario is the caseload, that the National Company Law Tribunal (“NCLT”) might have to deal with. This might as well crumble the insolvency system. And to tackle such issues, the Pre-Packaged Deal comes out as a hopeful recourse and the same is being pondered upon by the Government. So, it is imperative to reflect upon some critical points to see whether it is capable of bringing about a revolution or not.
What Are Pre-Packaged Deals?
In a Pre-packaged deal, corporate debtors get an opportunity to negotiate the valuation of assets along with structuring a repayment plan before the formal commencement of the insolvency resolution. It is a mix of out-of-court and in-court settlement mechanisms, the former being the new introduction. Essentially, here, the application under the IBC is filed after the negotiation procedure. So, for post valuation, only the approval of the Committee of Creditors and the NCLT is required. This reduces the multiplicity of legal proceedings and unnecessary interference since the approval of creditors had already been taken before reaching the NCLT. Besides, it is less time consuming and a cost-efficient strategy. This might allow companies to rescue themselves within time and not have to go for bankruptcy.
It also prevents undue depreciation in the value of assets. This could happen due to the overlong timeframe of 330 days for the completion of the insolvency process. However, instances show that even this time period is often stretched further. Additionally, insolvency also affects the reputation of the company which may lower down the value of its assets. So, these are definitely some promising positives of the pre-packaged deal and also have the potential to streamline the process. Although legally, the legislations are not expressly in favor of an out-of-court settlement. However, the Hon’ble Supreme Court’s decision in Lokhandwala Kataria Construction (P) Ltd. V. Nisus Finance and Investment Managers LLP gave a new direction to this matter, where a settlement between the parties was allowed even after the application was admitted.
Challenges To Pre-Packaged Deals
A pre-packaged deal seems like a significant alternative for the existing insolvency system. But this deal might succeed only if the challenges that come forth are addressed properly and the implementation is supervised well. So, despite having the advantages, some challenges around it must be addressed.
- Transparency is the main issue. Since pre-packaged deals occur in a confidential set-up, where the management is dominated by the corporate debtor, various apprehensions arise. From one point of view, this process is revered for less interference by in-court proceedings and from the other, the non-existence of moratorium makes it vulnerable. This is because the creditors would have the option of enforcing their rights and remedies anytime while the corporate debtor toils to negotiate. This could lead to unnecessary waste of time and effort and needs a check before implementation.
- As the negotiation takes place between the corporate debtor and the secured creditors, the negotiation leads to an exclusion of the unsecured creditors. So, approval is sought only from the former while the latter’s interests lie unprotected. This also corresponds to the unfair treatment of the unsecured creditors. In the Essar Steel Case, the Hon’ble Supreme Court held that the two shouldn’t be discriminated against and fair and equitable treatment should be followed. Moreover, the unsecured creditors might even approach the NCLT by filing a case to get a satisfying exit which defeats the time-efficient purpose of this deal.
- Another contention arises regarding the management. The fact that the same management which pushes the company into insolvency is tasked with the alienation of assets of the company would come with prejudices. As it would focus more on the interests of the corporate debtor and secured creditors over the unsecured ones. This could generate a sense of cooperation among these unsecured creditors who would ultimately take shelter under the in-court insolvency proceedings. This would result in a humongous number of in-court cases which essentially defeats the aim of this alternative which is relieving the NCLT of the caseload and promoting a swift procedure.
- There is also a greater chance of undervalued or preferential transactions. Since the process is a confidential one, the corporate debtor could practice its privilege. The assets of the corporate debtor might be sold to some party who is related to it, at a lower or preferential rate. More similar cases might occur where people are connected and such secretive harmony could escalate the opportunities for committing continuous fraud.
- Now, one of the biggest challenges is the inconsistency that would transpire due to Section 29A of the IBC. Section 29A bars certain categories of people from being a resolution applicant under the IBC. Essentially due to the subsistence of this section, people restrained from taking charge of the insolvency procedure would also include the corporate debtor. And the pre-packaged deal does aim to extend some autonomy to the corporate debtor during negotiation. It is the interplay of the two that creates a contradiction that needs to be looked upon. And section 29A appears to be inescapable legislation whose importance was emphasized by the Hon’ble Supreme Court in the case of Jaiprakash Associates Ltd. and Ors. Vs. IDBI Bank Ltd. and Ors, where strict commitment to Section 29A was deemed obligatory.
In the light of the prevalent pandemic, the Government has suspended the IBC, but there is no concrete plan as of now that could serve as an alternative. In this case, a mere suspension would only worsen the torment of the companies looking forward to insolvency. As per section 6 of the IBC, a corporate debtor is also allowed to initiate insolvency proceedings itself which means a lot of them would be looking forward to initiating one but the suspension is only exaggerating their distress. If not now, post upliftment of the suspension these companies might start rushing to initiate insolvency. This hints at the inability of the suspension in curbing the distress. Here, the pre-packaged deal could serve the state of affairs better because of the potential it has. And especially during COVID-19, it could be efficacious to carry out smooth insolvency proceedings. Even though there persist some evident challenges on its implementation. Once this issue is sorted, the pre-packaged deal could assuredly change the course of the insolvency regime in India.
The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020.
CIVIL APPEAL NO. 9279 OF 2017.
CIVIL APPEAL NO. 8766-67 OF 2019.
WRIT PETITION (CIVIL)NO 744OF 2017.
BY- AYUSHI SHRIVASTAVA | ILS LAW COLLEGE, PUNE