Pre packaged viable route to insolvency

Pre packaged viable route to insolvency

The Insolvency and Bankruptcy Board’s proposal to allow companies to withdraw from the process of voluntary liquidation is pragmatic. It will facilitate revival. This also makes the case for a pre-packaged insolvency resolution all the more compelling. Pre-packs entail a debtor-initiated reorganisation plan beforehand with creditors on board instead of a financial bidding process for resolution of the company admitted in the insolvency court. This will help speed up resolution and ease the burden on the National Company Law Tribunals.

In the US, the pre-pack plan takes effect once the company enters Chapter 11 that allows for a voluntary appeal by the debtor to be given a chance for a turnaround that the bankruptcy court can grant, if found feasible. The incumbent management retains control of the company until a final agreement is reached, thereby maintaining business continuity. India is weighing the UK system of bringing in a group of professionals to review the plan, which could include the sale of assets. It will make the process more transparent and ensure a market-based price discovery. The appointment of an insolvency professional to oversee the pre-pack process is workable too. Restructuring as a going concern would require operational creditors to be paid.

About 52% of the Corporate Insolvency Resolution Processes that were closed yielded orders for liquidation, compared to just 13.6% ending up with a resolution plan. Successful restructuring to turn around the company, rather than liquidation, underscores the need for the government to swiftly amend the law to allow pre-packaged plans. It would also enable the debtor to negotiate concessions with vendors, improve the health of banks and get the wheels of the economy moving.