Draft pre-packaged scheme for insolvency largely based on British law

Rules to ensure that process doesn't remain debtor-driven but protects creditor's interests

The draft pre-packaged scheme being finalised by the corporate affairs ministry has drawn largely on the UK’s system, a senior government official said. This also puts in place checks and balances to ensure that the promoter and related parties do not get the control of a company, keeping with Section 29A of the Insolvency and Bankruptcy Code (IBC).
 
The purpose of this scheme is not just to have a timely and faster resolution mechanism but also to give legal sanction to a plan agreed between banks, promoters, and the buyer. The draft scheme has already been finalised by the Insolvency and Bankruptcy Board of India (IBBI) and submitted to the ministry of corporate affairs (MCA).
 
Pre-packaged schemes involve an agreement between a stressed company, its creditors and a buyer before the initiation of insolvency proceedings.
 
The UK’s system of pre-packaged resolution, even though debtor-driven, engages an insolvency practitioner who has to be mindful of his/her duties to all the creditors of a stressed company and not the proposed purchaser. This is different from the US’ pre-packaged regime where a debtor formulates, negotiates, and solicits votes on the plan of reorganisation of a stressed company.
 
The steps in the pre-packaged scheme under government consideration would involve a debtor initiating the process with the lenders and then appointing an insolvency professional. The debtor will then find a buyer and consult the creditors to finalise a buyout scheme which can be placed before the National Company Law Tribunal (NCLT).

The Different Ways to resolve stressed assets 

• Corporate Insolvency Resolution process under the Insolvency and Bankruptcy Code
• Reserve Bank’s prudential framework for one-time restructuring
• Compromise and arrangement scheme — Section 230 of Companies Act
• Bilateral agreement between two parties
• Pre-packaged scheme — no provision yet

 
“The pre-packaged framework would provide for the role and responsibilities of the resolution professional, including for the conduct of process in a transparent and fair manner keeping in view the interest of different stakeholders. The framework combines flexibility and speed of an out-of-court process and legal protection of formal proceedings,” said Ashok Haldia, former secretary of Institute of Chartered Accountants of India.
 
Haldia also said that IBC needs to provide a detailed framework to facilitate seamless and transparent pre-pack. “Formulation, negotiation, and finalisation of pre-pack would involve issues of principles and procedures. These will have to be resolved so that pre-pack can offer a viable solution for a company under stress.”
 
It has been proposed that before the insolvency application is admitted by the NCLT, the promoter and lenders have to reach a broad understanding on the plan and complete processes, such as claim verification and reasons for insolvency.
 
“Part of the work has to be done before the corporate insolvency resolution process starts...Then the parties can agree to a plan and simply get the blessings of the adjudicating authority. The third party has to be 29A compliant,” said the senior government official.
 
He said that the government will provide a list of tasks that will need to be done before lenders and promoters approach the NCLT with their plan.
 
The government will amend the IBC to make provision for the pre-packaged scheme which would come into play before the corporate insolvency resolution process kicks in.
 
There are currently four routes for resolving stressed assets — corporate insolvency resolution under the IBC; the RBI’s prudential framework for one-time restructuring which is only available to the banks; the compromise and arrangement provision under the Companies Act, and a bilateral agreement between two parties.
 
Experts say the UK's mechanism also involves a group of experts who review the plan before it is filed for legal approval.
 
The insolvency professional has to give assurance that the best interest of the creditors was served. India, too, could look at a system of a peer review of a pre-packaged scheme by professionals.
 
In order to address the ethical considerations around the pre-packaged schemes, such as prior dealings between the company’s directors and the insolvency professional, disclosures will have to be provided by the concerned parties.