Sahoo panel hopes govt will soon say ‘yes’ to pre-packs

K. R. Srivats New Delhi | Updated on January 10, 2021

IBBI Chairman MS Sahoo   -  Manvender Vashist

IBBI Chairman recommends the simplest variant of pre-packaged insolvency resolution process

The time is ripe for the government to provide a framework for pre-packaged insolvency resolution process (pre pack) as an additional option for resolution and the ordinance route should be used for this purpose, the government-appointed Sahoo Panel on pre-packs has recommended.

IBBI Chairman MS Sahoo, who headed the panel, on Sunday expressed hope the government would soon take a decision to introduce a pre-pack framework, which could side step the difficulties of the current Corporate Insolvency Resolution Process (CIRP).

Sahoo’s remarks are significant as the report, which was submitted in October 2020 and now made public on Friday last, had flagged that pre-packs are warranted, given the rigidities in the current formal CIRP mechanism, and more so when there is a likelihood of increase in insolvencies once the suspension on initiation of CIRP expires (CIRP suspension due to Covid-19 willexpire on March 25 after extension from December 25 last year).

The report suggested that a pre-pack should be available side-by-side with CIRP so that the CIRP is used as the last resort for resolution of stress. Pre-pack introduction would require amendment to Insolvency and Bankruptcy Code (IBC). “CIRP being a formal process has some amount of rigidities, while market prefers flexibility to work out a tailor made resolution best suited to their circumstances. CIRP offers benefits. It also has difficulties. Today, CIRP is not available in terms of Covid-19 defaults; is not available for defaults less than ₹1 crore; also, availability of resolution applicants is a concern in wake of Covid-19.

“So, a hybrid mechanism like pre-pack that blends both informal and formal part is necessary. The ground is ready in India to experiment pre-pack as an additional mechanism for resolution of stress,” said Sahoo.

A restructuring plan

Put simply, a pre-pack is a restructuring plan, which is agreed to by the debtor and its creditors prior to the insolvency filing, and then sanctioned by the court on an expedited basis. In a pre-pack, a troubled company and its creditors negotiate the terms of an insolvency resolution plan prior to the commencement of the formal insolvency process, which allows the formal process to be completed at maximum speed.

Sahoo said that insolvency laws around the world provide for pre-packs, in addition to the regular resolution process. Pre-packs have emerged as an innovative corporate rescue method that incorporates the virtues of both formal and informal proceedings. It is the preferred hybrid framework as it is considered fast and cost-effective in the resolution of stress, with least business disruptions and stigma associated with a formal insolvency process, he added.

What the report says

Sahoo panel has, in its report, recommended that pre-pack should be available for all corporate debtors (including MSMEs) and for any stress – pre-default and post-default. Pre-pack regime should be implemented in phases; must begin withdefaults from ₹1 lakh to ₹1 crore and Covid-19 defaults. This can be followed by default above ₹ 1 crore, and then default from ₹ 1 crore to ₹1 lakh, the panel recommended.

This panel has recommended a “simplest variant” of the pre-pack framework within the basic structure of the IBC. More advanced features can be built in course of time, the panel has said.

Invites public comments

The Corporate Affairs Ministry (MCA) has now invited public comments on the Sahoo panel report by January 22.

The report said that promoters who get disqualified under Section 29A of the IBC cannot participate in pre-packs. Also, the corporate concerned would remain under the control and possession of the current promoters and management during pre-pack process, the panel suggested.

Published on January 10, 2021

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