Prepack insolvency resolution: Swiss Challenge options, IBC tweaks on cards

The M S Sahoo committee has suggested two options on prepacks — with and without a ‘Swiss Challenge’ — and a quick amendment to the Insolvency and Bankruptcy Code (IBC), preferably by an Ordinance. It is, however, categorical that there shall be no dilution of the provisions of Section 29A of the IBC.

In cases with a Swiss Challenge, the rights of operational creditors (OCs) and dissenting financial creditors (FCs) are to be protected subject to the minimum comfort provided under Section 30(2)(b) of the IBC; and in instances without it, there is to be no impairment to OCs. The prepack is to start with a base resolution plan (BRP), which will face a Swiss Challenge; and this should come from the promoters if they are eligible and interested. Otherwise, the committee of creditors (CoC) may arrange a BRP.  
 

The prepack is to allow 90 days for the submission of a resolution plan (RP) to the adjudicating authority (AA) and 30 days thereafter for the AA to approve or reject it – or 120 days in total. 

The RP approved by the AA is to be binding on everyone, and the successful resolution applicant can start on a clean slate.

A Swiss Challenge enables a prepack offer (a deal for the resolution of a distressed firm with an agreement already arrived at between the creditors and investors) to be matched so as to better the value-realisation by another interested party. Promoters can also make a counter-offer. 

“The biggest change in the prepack scheme is that a corporate debtor (CD)  is in charge, not lenders,” said a source. Spelling out the reasons for incorporating the 'Swiss Challenge' as a safeguard, the panel observed: “The introduction of the prepack and conferment of benefits as available for Corporate Insolvency Resolution Procedure (CIRP), the possibility of certain purely commercial deals being entered into between corporates being portrayed as RPs under prepack cannot be ruled out.”

The Sahoo panel is of the view that no two proceedings – the prepack and CIRP – are to run in parallel. And there is to be a cooling-off period of three years after the first prepack for another to be set in motion.

The CoC is to take decisions with the approval of the required majority of votes, present and voting. The decision to liquidate the CD —that is, the borrowing entity — would require the approval of 75 per cent of the voting share. The CoC may decide to close the process with the approval of 66 per cent of the voting share, present and voting if the CD were to engage in activity which has the potential to cause depletion of assets or value to the detriment of creditors. It may even decide with 75 per cent of the voting share to liquidate the CD during the prepack process.

“The Swiss Challenge needs to balance the incentives and disincentives of the promoter and the Swiss Challenger to maximise value and the details of such design should be specified through regulations," said the panel. The pre-pack shall not end up with liquidation, except when the CoC decides to liquidate the CD with 75 per cent voting share. There will, however, be no liquidation where pre-pack was initiated for pre-default stress, and default below the threshold for initiation of CIRPs and Covid-19 defaults.