The sub-committee of Insolvency Law Committee (ILC) of the Ministry of Corporate Affairs, Government of India (MCA) in its report dated October 31, 2020 has proposed the framework for the pre-pack and prearranged insolvency resolution process which the Government may adopt with / without modification.

MCA sought public comments on the said report by 22^nd January 2021, vide notice dated 8^th January 2021.

The report recommends at para 3.3 that pre-pack insolvency shall be commenced by filing application with the Adjudicating Authority (AA) under the Insolvency and Bankruptcy Code, 2016, i.e. National Company Law Tribunal (NCLT).

It is widely acknowledged that AA is burdened with huge cases without corresponding strength to dispose of the same in a timely manner (para 1.20 states average period of CIRP as 380 days after excluding period excluded by the AA).

At para 3.1 of the Report it is noted that there is likelihood of increase in insolvency filings by/against Corporate Debtor (CD) as suspension on initiation of CIRP expires, coupled with the limited capacity of the AA, it is the right time to introduce prepacks in India.

At para 3.77, the Sub-committee notes that “Though pre-pack is lighter for the AA, the number of pre-packs could be overwhelming. The pendency of applications for admission, which is huge, may increase once the suspension of application for CIRP in respect of COVID-19 period default expires. The case load may increase further once the proposed SIRP for MSMEs is implemented.” – (SIRP is Special Insolvency Resolution Process meant for MSMEs).

Having recognised these, the sub-committee strangely recommends to the contrary at para 3.34 “the law should specify requirements for making an application to the AA...”, thus, effectively it proposes to further burden AA with new cases of pre-pack admission!

Further, at para 3.33 of the Sub-Committee Report states “In the interest of flexibility which make pre-pack advantageous, the process before the admission should be flexible and not codified. It should be left to mutual understanding among the stakeholders and such understanding or process of understanding should be informal. For example, the law should not prescribe whether a meeting of creditors is required to obtain approval, when it should be organised, who will chair the meeting, how votes will be taken, etc. It should be sufficient if the proposal to explore pre-pack has approval of majority of unrelated FCs.” FCs i.e. Financial Creditors.

And, at para 3.23 for initiating pre-pack, it is recommended that shareholders/partners of CD shall approve it by simple majority. And at para 3.22 it recommends consent of simple majority of unrelated FCs for initiation of pre-pack. Thus, the commencement of pre-pack is proposed to be consensual (also acknowledged at para 3.25) and not adversary process.

In consensual process, involving AA for admitting pre-pack process needs to be done away. And if requirement of approval of the AA for commencing/admitting pre-pack process is done away, it can not only save the precious time of AA, considering that admission of CIRP cases takes not less than 6 months but also help achieve much required speed under pre-pack process.

Further, under the proposed pre-pack process, there cannot be benefit of pre-admission withdrawal as under regular CIRP and hence the purpose of filing application for admission of pre-pack seems inconsequential and barren.

The next question then arises is how AA will know if the CD against which application is filed for commencing regular CIRP is under pre-pack process or not, as during pre-pack process, regular CIRP shall remain suspended - para 3.78(e).

If the purpose of filing application with AA for admission of pre-pack process is (i) to maintain transparency and (ii) keep informed the concerned AA and public at large if the CD is under pre-pack process or not, the answer lies in the proposition under Para 3.49 of the Sub-Committee Report. It recognises electronic publication of Public Announcement on the website of CD and designated website of IBBI and that of Information Utilities. Thus, the recommendation of electronic publication of public announcement addresses concerns of transparency and keeping all concerned informed.

Instead of filing application with AA for commencement/admission of pre-pack process and appointment of RP, it may be provided that the RP appointed by the shareholders of CD and confirmed by unrelated FCs/Operational Creditors (OCs – where there are no unrelated FCs)  shall intimate to the AA about the Pre-pack Commencement Date (PCD).

Further it may be provided (by regulation) that the IBBI to display name of the CD and the PCD on a designated website (and may also the date of closure) along with the name and contact details of RP instead of submission of progress report(s) considering time frame envisaged is only 90 days. This is recognised by the Sub-Committee at para 3.49 of its report.

Thus, the objective (per para 3.30) that AA shall know while dealing with regular CIRP applications for admission (Ss. 7, 9 and 10 of the IB Code) about the pre-pack process if commenced by the Corporate Debtor or not, can be served when intimation is given to it by the concerned Insolvency Professional. Intimation may be given to the AA within whose jurisdiction registered office of the Corporate Debtor is situated.

Lastly, the relevance of filing application with the AA for initiating pre-pack remains in view of the recommendation at para 3.57 that moratorium shall not be automatic or as a matter of right of the CD. Only, in cases where the moratorium is requested (fully as under Sec.14 or partially) by the CD at the time of seeking consent of unrelated FCs/OCs to commence the pre-pack resolution process and is not agreeable to the said FCs/OCs, CD may be mandated to apply to the AA to determine granting of moratorium, if any and its extent.

There is no doubt that to make the outcome of pre-pack process binding, the same needs to be formally blessed by the AA, as stated at para 3.13 of the Sub-Committee Report. While that may be retained, instead of filing application for the commencement of pre-pack process, it can serve the purpose if AA is informed about the same.

The Government may consider having provision in the IBC for pre-pack resolution process on experimental basis, the filing with AA be limited only for approval of the pre-pack resolution plan and as exception for determining scope of moratorium where there is no consensus between CD and unrelated FCs. AA need only be informed about commencement of pre-pack process and it closure whether the pre-pack process was successful or failed and closed or where the Committee of Creditors have decided to initiate liquidation process.