The Ministry of Corporate Affairs (MCA) is reportedly working out a draft scheme on "pre-packaged" resolution for corporate entities in coordination with the Insolvency and Bankruptcy Board of India (IBBI). 

It is a newer method of corporate resolution that involves an agreement between the company, its creditors and prospective buyers before the initiation of insolvency proceedings. Let's take you through its finer points, shall we?

What is a Pre-Packaged Resolution Plan?

Pre-packaged insolvency processes (hereinafter referred to as "pre-packs") are arrangements in which the sale of all or a part of the company's business or assets is finalised with a buyer before the appointment of a Resolution Professional (RP) takes place. 

The objective is to protect the business from liquidation while taking the interests of creditors into account. Because it commences BEFORE initiation of formal proceedings, it can theoretically reduce time (and money) spent on taking the entire process through litigation. 

It is not a novel scheme, but niche. The bankruptcy codes in the USA and UK already have facilities in place for the debtor to initiate pre-packs. 

How Does It Work?

Fundamentally, a pre-pack is an instrument of debt-restructuring. The mode of restructuring varies from company to company depending upon the type of business it undertakes, the level of its indebtedness and the stage of financial distress it is in. 

The terms of the pre-pack are designed after taking all the above criteria into account. Once the terms are agreed upon and the company files for bankruptcy, the pre-pack is swiftly executed by the RP.

So, the part that sets pre-packs apart from other modes of resolution is the promptness with which they are executed. Also, no court permission is required to initiate the pre-pack process (although it is required to enforce them).

Who Takes Charge of the Distressed Company During the Pre-Pack's Operation?

It varies across jurisdictions.

USA has a "debtor-in-possession" concept so the company retains ownership and management while finalising the terms of its restructuring. The UK, however, has an "administrator-centric" focus which enables the court-appointed RP to take charge. 

India leans towards the UK pre-pack regime in the manner that the central idea behind the IBC was to shift the process of resolution from a debtor-controlled to a creditor-controlled system. 

Why Opt For It?

One. Speed. At the core of the corporate resolution process lies the gospel of "value-maximisation" of the distressed company's assets. With every passing day in the resolution window, the fair-value of the company's assets depreciates, which is why a scheme involving advanced negotiation of asset values comes in handy.

Speed is a dually-advantageous element here because it benefits not just the company but also the administrators i.e. The courts and tribunals. IBBI data shows that as of June 2020, out of the 2,108 ongoing resolution cases, 1,094 are pending well beyond the IBC-mandated 270 days. Imagine de-cluttering that overburdened roster!

Two. Cost-cutting. Reduces vital litigation costs because most negotiation and documentation of the proposed plan is done out of court.

Three. If imposed as per guidelines, pre-packs would have statutory sanction. Much like an arbitration clause, it will have binding effect on the parties and the debtor will face direct liquidation if it fails to implement its structured obligations.