Explained: What are pre-packs under the present insolvency regime?

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

Facts:

  • Pre-Pack: It is a pre-planned process in which a financially distressed company and its creditors reach an agreement with a buyer for its sale prior to initiating insolvency proceedings.The sale then takes place on the date of initiation of insolvency proceedings or after the appointment of insolvency administrator.
    • In India’s case, such a system would likely require the approval of the resolution plan from the National Company Law Tribunal (NCLT).
  • Global Scenario: The pre pack system of insolvency proceedings has become increasingly popular in the UK and Europe over the past decade.
  • Benefits:
    • Pre-packs avoid lengthy negotiations with creditors after the commencement of insolvency proceedings enabling expeditious insolvency resolution with minimal involvement of courts and tribunals. 
    • In the case of pre-packs, the incumbent management retains control of the company until a final agreement is reached.
  • Drawback: 
    • The key drawback of a pre-packaged insolvency resolution is the reduced transparency compared to the Corporate Insolvency Resolution Process(CIRP) as financial creditors would reach an agreement with a potential investor privately and not through an open bidding process.

Additional Facts:

  • Insolvency and Bankruptcy Code(IBC): It was implemented through an act of Parliament in 2016.It provides for a time-bound process to resolve insolvency and the code applies to companies, partnerships and individuals.