Pre-pack

Pre-pack

Subject: Economy

Context: According to the report submitted by the panel headed by Insolvency and Bankruptcy Board of India chairman M S Sahoo, the ‘pre-pack’ insolvency scheme will be available for any stress i.e., pre-default and post-default.

Concept:

• The scheme is sought to be put in place to for the identification of stress in the banking system, facilitate fast resolution of bad loans before the debtor faces substantial value erosion and reduce costs and litigation.
• This seeks to ensure resolution of the debt of a distressed company.
• It seeks to do it through an agreement between investors and secured creditors unlike public bidding process in IBC.
• It has a time limit of 90 days and 30 days for plan to be approved by NCLT.

Sahoo panel recommendations on ‘pre-pack’

• Implementation may be phased, starting with defaults from Rs 1 lakh to Rs 1 cr and Covid defaults
• Eligible promoters to retain control of debtors
• Usually, promoters will submit a base plan, which will face Swiss challenge
• No liquidation for defaults below Rs 1 cr and Covid-19 defaults
• Resolution plan to be submitted in 90 days; NCLT to approve it in 30 days
• IBC may be amended quickly to roll out pre-pack, preferably by an Ordinance

Why pre-pack schemes?

• Much faster: Current IBC process takes almost 270 days for corporate insolvency resolution.
• Reduce litigation: As basis is prior consultation mong stakeholders.