India – New Year, New Resolutions – ILC Sub-Committee Issues Report On Pre-Packaged Insolvency Resolution.

Availability

• Pre-pack should be available for all Corporate Debtors (‘CD’) which should be implemented in a phased manner, for defaults of INR 1 lakh to INR 1 crore and COVID-19 defaults for which corporate insolvency resolution process (‘CIRP’) is not available.
   

Initiation

• Unlike CIRP, Pre-pack should be initiated by the CD.
   

• To curb Pre-Pack’s misuse, the CD’s default should be within the above threshold.
   

Tasks prior to Pre-pack

• Initiation of Prepack should require the consent of simple majority of unrelated financial creditors (‘FC’) or simple majority of shareholders of the CD.
   

Management of the CD

• The Sub-Committee preferred a debtor-in-possession with creditor-in-control model for resolution of stress through pre-packs as it incentivises the CD to initiate pre-pack. This will avoid shocks to the operations of the CD associated with a shift from the current management to an independent resolution professional (‘RP’).
   

• However, key decisions enumerated under section 28 of the IBC (such as interim finance, creation of security, change in capital structure, etc.), should only be with approval of the committee of creditors (‘CoC’).
   

RP – Appointment & Role

• RP to be appointed by CD, with consent of majority unrelated FCs.
   

• RP’s role limited to overseeing the process. The RP does not assume management of the CD / run business.
   

• RP should ensure that CD is not run in a manner detrimental to the process, ensuring transparency and fairness, safeguarding the interests of stakeholders, business, and ensuring compliances with the law.
   

Decisions by the CoC

• Recommended that the CoC should approve / reject a plan, like in CIRP, by 66% majority.
   

• Additionally, CoC may also: (i) terminate the process, (ii) liquidate the CD, and (iii) decide matters under section 28, by 66% majority.
   

• Threshold for approving liquidation is revised to 75% majority.  All voting (other than regarding liquidation)
  on present and voting basis.
   

Timeline

• Maximum of 90 days for submission of plan to the tribunal, and 30 days for approval.
   

Process

• Information Memorandum prepared by the CD and certified by Chairman / Managing Director to be handed over to the RP on commencement date.
   

• RP should appoint two valuers to assess liquidation and fair value.
   

• Moratorium under Section 14 of the IBC should be available till closure of process. Moratorium to not cover essential services.
   

• Other safeguards– (i) special granting of moratorium (vs automatic applicability), (ii) early termination on misuse, and (iii) control of CoC for matters under Section 28..
   

• For value maximization, the following recommendations are made:

   

  1. Base resolution plan to be kept ready, possibly by the CD’s management (preferably in consultation with stakeholders), to be placed before the RP in 2-3 days of Pre-pack commencement;
      

  2. Pre-pack may, then, offer two approaches:
      

Resolution Applicants

• Potential resolution applicants for a Pre-pack resolution should meet the requirements as under Section 29A of the IBC

Basic Structure

• Report suggests starting with the simplest variant of pre-pack, which can be rolled out with the existing ecosystem.

Legal Framework

• IBC may make skeletal provisions enabling pre-pack via an Ordinance.