While the Insolvency and Bankruptcy Code (IBC) in India, in its current form, does not facilitate the pre-pack concept, it’s not difficult to see how the IBC could be amended to introduce pre-packs in a formal way.
By Paul Williams
A ‘pre-pack sale’ can be defined as “an arrangement under which the sale of all or part of a company’s business or assets is negotiated with a purchaser prior to the appointment of an insolvency professional as administrator, with completion of the SPA being conditional upon the administrator’s appointment. The SPA is held in escrow and the administrator effects the sale immediately on, or shortly after, his appointment.”
In the UK, pre-packs have become popular since the Enterprise Act 2002, which has made administration the dominant insolvency procedure. In the US, pre-packs are often used in a Chapter 11 filing. The UK is a mature regime and the pre-pack process has been part of an evolution rather than a revolution. The process is used successfully in the UK, although it is not always without controversy.
That said, the objectives are clear:
> Obtain a better return to creditors than would be possible if the company were to be sold through an insolvency process (through the preservation of value that could otherwise be eroded because of a formal insolvency process);
> Reduce professional costs associated with an insolvency process by streamlining the process;
> Provide certainty of outcome to stakeholders (including creditors and the purchaser).
These objectives are aligned to the objectives of the corporate insolvency resolution process (CIRP).
The UK pre-pack process, in most cases, results in a survival of the business, but not the survival of the company. This is because the administration procedure provides for a hierarchical objective of first saving the company. However, if this is not possible, then the goal is to save the business.
While the Insolvency and Bankruptcy Code (IBC) in India, in its current form, does not facilitate the pre-pack concept, it’s not difficult to see how the IBC could be amended to introduce pre-packs in a formal way. Point to consider: In the UK, pre-packs are not governed by the insolvency legislation, but by best practice guidelines.
News reports suggest that the Indian ministry of corporate affairs is exploring the option of introducing pre-packaged insolvencies in India and running the process in a fair and transparent manner. In such a case, the planned scheme, if implemented, will be a “pre-IBC window for the resolution of stressed assets, which will complement the existing framework, and not substitute it.” Pre-packs could help reduce the significant CIRP and legal costs that are incurred in the 180-day prescribed time period under the IBC, whilst cutting down the time considerably and preserving better value on the assets.
By amending the IBC, the perceived concerns of the process can be addressed, thus increasing buy-in to the process. There are obvious challenges around eligibility of corporate debtors, balanced treatment of all the stakeholders and transparency of the marketing process. The implementation will, however, not be without challenges, some of which would entail promoters of businesses not cooperating with the incoming management or the present creditor group so that due-diligence of the asset is stalled, and secondly getting the non-financial creditor classes to agree to the reorganised scheme would have its own difficulties.
However, these could be prescribed by the IBC. That said, a balance must be made so as not to regulate too heavily the pre-pack process, thus removing the benefits that are witnessed in other regimes. In more mature markets, the ability of practitioners to exercise judgement and to be able to support their decisions is key to the efficient working of the pre-pack process.
With strong regulation of practitioners by the Insolvency and Bankruptcy Board of India and the implementation of voluntary best practice guidelines by the profession, the introduction of a pre-pack process should achieve the overarching objectives of the IBC, and retain jobs, promote growth, preserve value and ensure creditors receive the funds due to them. Pre-packaged insolvencies would lead to the rise of newer classes of professionals and set a precedent for insolvency proceedings.
(The author is managing director, Duff & Phelps)