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Prepacks in Insolvency regime

pre-packs in Insolvency regime

The Ministry of Corporate Affairs (MCA) has set up a committee to look into the possibility of including what are “pre-packs” under the current insolvency regime to offer faster insolvency resolution under the Insolvency and Bankruptcy Code (IBC)

What is it?

Also called as pre-packaged insolvency, It is an agreement for the resolution of the debt of a distressed company. It is done through an agreement between secured creditors and investors instead of a public bidding process. The process needs to be completed within 90 days so that all stakeholders retain faith in the system

Advantages:

1. This process would likely be completed much faster than the traditional Corporate Insolvency Resolution Process (CIRP) which requires that the creditors of the distressed company allow for an open auction for qualified investors to bid for the distressed company. It would act as an important alternative resolution mechanism to the CIRP and would help lower the burden on the National Company Law Tribunal (NCLT).

2. In the case of pre-packs, the incumbent management retains control of the company until a final agreement is reached. This is necessary because Transfer of control from the incumbent management to an insolvency professional as is the case in the CIRP leads to disruptions in the business and loss of some high-quality human resources and asset value.

3. Also, a financially distressed company can continue its operations during the period leading to a formal default, and even thereafter, without the resultant reputational risks, business disruptions, or value erosion.