[Krrishan Singhania is the Managing Partner at K. Singhania & Co. Srishti Singhania is a Senior Associate at K. Singhania & Co. and Ashuthosh V (trainee) is a IV-year law student at Nirma University.
Part 1 of this post is available here]
Comparative Analysis
The concept of pre-packaged insolvency resolution mechanism is not a new one as it is a huge success in other jurisdictions like the United States of America, and the United Kingdom. However, unlike in India, there is no specific set of provisions that mention pre-packaging in their respective insolvency regimes.
United Kingdom
In the UK, there are no statutory provisions that explicitly mention a pre-packaging mechanism. This concept has evolved[i] through the power of the administrator to sell the assets of the debtor without the approval of the creditor. In 2017, there have been 356 pre-packaged administrations that were reported. A pre-packaged administration is considered to be speedy, confidential, and helps preserve the value of the debtor’s company and its assets. The concept is to protect the business rather than the company itself. The administrator must be provided with sufficient reasons and justifications to opt for a pre-packaged mechanism as there is no other alternative available to rescue the business and that such a sale would help in achieving the interests of the creditors.
The administration (resolution professional in India) is involved in the pre-pack mechanism in the capacity of an advisor who will assist the management in decision making during the process. After appointment by the court, the administrator shall be involved in executing the transaction such that the interests of the creditors are achieved while ensuring effective restructuring to avoid subsequent liquidation. The Statement of Insolvency Practice 16,‘Pre-packaged Sales in Administration’ (“SIP 16”) states that an independent valuation needs to be conducted by the administrator, to ascertain the true value of the business and every potential bidder would be considered to purchase the debtor’s company. This is to ensure that the best available consideration is obtained for the interest of the creditors.
The administrator must then disclose to the creditors, sufficient information that would enable the creditors to make an appropriate and informed decision and so that it can be viewed by any reasonable person that the pre-packaged mechanism was executed in a way appropriate to the creditors’ interests. Such statement of disclosure must be provided to both the creditors as well as the government at the earliest opportunity.[ii]
Since there is no administrator (or resolution professional in India) involved in the process, India can include a step in our PPIRP regime that allows for an independent valuation of a resolution plan as this would further add to the commercial wisdom of the committee of creditors and help the creditors make a much more informed decision. Such valuation would also help to ascertain the true value of the assets of the corporate debtor and this would remove a significant possibility of fraudulent transactions that are entered with the sole objective of deceiving the interests of the creditors.
United States of America
In the USA, there are three forms of hybrid resolution mechanisms:
- Pre-packaged bankruptcy proceedings;
- Pre-arranged bankruptcy proceedings; and
- Pre-plan sales.
The first two mechanisms are provided under the US Bankruptcy Code, under chapter 11 that allows pre-packs to be accepted or rejected by a creditor. In addition to chapter 11 proceedings, the Bankruptcy Reform Act, 1978 expressly provides for creditors to vote for a pre-packaged or pre-arranged plan prior to the filing of a bankruptcy application.
Pre-packaged and Pre-arranged mechanism are considered to be efficient and take lesser time than the traditional formal proceedings or pure ‘out of court’ settlements.
Pre-packaged bankruptcy proceedings
In pre-packaged proceedings, the debtor proposes a plan to the creditors and other relevant stakeholders along with a disclosure statement so that an informed decision can be made and such plan should be approved by the court prior to its circulation. Although, the disclosure need not be approved, it must comply with the applicable law (section 1125(a)(1)) which states that “adequate information” must be provided.
Pre-arranged Mechanism
In the pre-arranged mechanism, the debtor would have to negotiate the plan with the majority of creditors prior to circulation. The difference is that it need not be circulated with all interested parties and thus, a disclosure statement need not be filed.[iii]
In both the cases, the plan needs to be accepted by every class of creditors and the same must be filed before the court under chapter 11 of the Bankruptcy Code. The court would then confirm that the plan complies with the requirements under section 1129(a). A few requirements under the section are as follows:
- The plan must be made in good faith;
- The plan must not be forbidden by law;
- The plan must be accepted by every class of creditors (or impaired interested parties); and
- Dissenting creditors must receive an amount not less than what they would have received under liquidation.
In specific cases where every class of creditors do not accept the plan, the court shall have the power to accept such plan if it conforms with every other requirement under section 1129(a) and if it does not discriminate such dissenting class of creditors. In simple terms, a plan must be fair and equitable to all creditors.
Pre-pack sales Mechanism
Under pre-plan sales mechanism, which is governed by section 363 of the US Bankruptcy Code, the debtor can sell all or a substantial part of its assets without the requirement of approval by all creditors. Thus, there is no requirement of a vote by all impaired interested parties. This makes a plan much simpler, quicker, and more certain. However, there are several procedural requirements under section 363 that need to be complied with. Moreover, the court must approve such a pre-plan sale and in the absence of standards to approve such a plan, the courts have shown a trend of approving such pre-plan sales in case where the debtor justifies that there is a “good business reason” for the same.
Lastly, section 363 does not mention any particular procedure for the sale of assets but the general practice in the USsuggests that a public auction is involved and the process is more of a public sale rather than a private sale. This helps increase transparency and avoid bad business conducted by connected parties.
India can adopt such a mechanism through which debtors are able to sell its assets without requiring the approval of all creditors. The current mechanism in India does not provide for a mechanism to ascertain the value of the debtor’s assets. However, the final resolution plan must be approved by the NCLT to be executed. This increases the burden on NCLT and instead of reducing the number of cases before the tribunal, such approvals shall increase the case load and does not highlight as to whether the value of the assets were fair.
The process of sale is to be made public in order to make the procedure more transparent, especially when related or connected parties make bids to purchase such assets of the corporate debtor. India’s pre-pack mechanism lacks statutory provisions that help to maintain or increase transparency in situations where connected parties are involved. Further, as provided in the UK, an independent valuation of such assets must be calculated to ascertain the ‘fair value’ of the assets to be sold in auction.
Conclusion
The authors would like to conclude by highlighting that there is a need to revisit the sub-committee report and introduce changes that would address all concerns by expanding the scope of application of the mechanism in India, ensuring requirements to maintain transparency in special cases where connected parties are bidders, and resolve the issue of overburdening of the tribunal for trivial mandates by assigning certain powers to the IBBI to grant mandates under chapter III-A for the procedural issues concerned with PPIRP.
[Concluded]
– Krrishan Singhania, Srishti Singhani & Ashuthosh V
[i] Oitihjya Sen, Shreya Prakash, & Debanshu Mukherjee, Designing a Framework for Pre-Packaged Insolvency Resolution in India: Some Ideas for Reform, pg. 19 (Vidhi Centre for Legal Policy, Report, February 2020), https://vidhilegalpolicy.in/wp-content/uploads/2020/02/Report-on-Pre-Packaged-Insolvency-Resolution.pdf.
[ii] ICAEW, Statement of Insolvency Practice 16, para 6, https://www.icaew.com/-/media/corporate/files/technical/insolvency/regulations-and-standards/sips/england/sip-16-e-and-w-pre-packaged-sales-in-administrations-2015.ashx.
[iii] Ben Larkin et al., Restructuring Through US Chapter 11 and UK Prepack Administration, in The Law and Practice of Restructuring in the UK and US para 8.51 (Christopher Mallon & Shai Y. Waisman eds., 1st edn., 2011).
