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Pre-pack process to cut costs and time

The government has suspended the Insolvency and Bankruptcy Code (IBC) till 31 March 2021, but it is in the process of implementing a pre-pack scheme to fill the vacuum during the period. It is expected that Pre-pack process will certainly cut costs and time.

The government on 8 January 2021 released draft framework of the pre-pack scheme, and has invited public comment on the same by 22 January 2021.


According to the draft framework, only a company in default can initiate a pre-pack process with simple majority consent of the financial creditors and shareholders. Unlike in the corporate insolvency resolution process (CIRP), where the management of the defaulting company goes into the hands of the resolution professional, who is appointed by the creditors, in pre-pack scheme, the promoters and management will continue to have control of the company.


As per the draft framework, the pre-pack scheme should be available for all corporate debtors and any stress -- pre-default and post-default. It recommends phased implementation of the scheme.


Though resolution professional will be appointed, he will only be responsible for smooth running of the pre-pack process, which is supposed to be completed in 90-120 days for filing of resolution plan with the AA plus 30 days for AA to approve it. The CIRP takes 330 days for completion.


It may commence in respect of defaults from Rs. 1 lakh to Rs. 1 crore and COVID-19 defaults for which CIRP is not available today, followed by default above Rs. 1 crore, and then default from Re. 1 to Rs. 1 lakh.


As the company will be under the control of the existing management, it will be the responsibility of the management to provide an updated list of outstanding claims, including contingent and future claims, and a draft information memorandum, based on its books, duly certified by its chairman/ managing director/managing partner along with an indemnification that if any claim is omitted, they will be personally liable to make such claim good. If the management of the company wilfully provides any wrong information or omits to provide material information with respect to any claim, the same will attract criminal liability.


The Committee of Creditors (CoC) will take decisions with the approval of the required majority of votes, present and voting. Only the decision to liquidate the corporate debtor would require approval by 75 per cent of voting share. The CoC may decide to close the process with the approval of 66 per cent of voting share, present and voting, if the CD engages in any activity which has potential to cause depletion of assets or value to the detriment of creditors. It may even decide with 75 per cent of voting share to liquidate the CD at any time during the pre-pack process.

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