What is prepackaged insolvency resolution & how does process work?

Synopsis: This article analyses the prepackaged insolvency resolution.

Read about – Pre-pack insolvency mechanism

What is the prepackaged insolvency resolution?

• Prepackaged resolution is a fast-track process that identifies a resolution plan before the pro­cess is admitted by the Nat­ional Company Law Tribunal.
• It is an arrangement where the promoter of the stressed company proposes a resolution plan to the creditors before the company can be taken to bankruptcy proceedings.
• The purpose of this scheme is not just to have a timely and faster resolution mechanism, but also to give legal sanction to a plan agreed among banks, promoters and the buyer.

How does the process work?

• The scheme is currently available only for MSMEs and follows a debtor-in-possession model.
• The promoter of the MSME can propose a base resolution plan to the committee of creditors (CoC).
• If the plan is not acceptable, then the resolution professional would invite other applicants to propose a plan within 90 days.
• The CoC can go for the alternative resolution plan if it is significantly better than the base resolution plan proposed by the promoter.
• It can also ask the promoter to revise its plan.

How is it different from the corporate insolvency process?

• Under Corporate Insolvency Resolution Process (CIRP), the company is managed by the resolution professional. Whereas a pre-pack process does not result in the change of the company’s management while the process is on. The management would continue to vest in the board of directors or the partners.
• Further, the deadlines have been moved up for the prepackaged scheme compared to CIRP.
• For instance, the corporate debtor has to submit the resolution plan within two days of the commencement of the prepackaged insolvency. Further, the entire process has to be completed within 120 days of the commencement date.

Eligibility for a pre-pack option?

• To be eligible for pre-pack, a company must not be undergoing a corporate insolvency resolution process.
• A pre-pack cannot be initiated within three years of closure of another pre­pack.

What are the benefits of the prepackaged scheme?

• Expected to involve fewer legal disputes and faster resolution than a CIRP.
• It Will prove to be a quicker, cost-effective insolvency resolution process
• Also, it will be least disruptive to the businesses, ensuring job preservation.
• Similar provisions for large cor­porate entities can help in re­solving stress early and cut re­solution time for corporations staring at default.