Pre-packs in the Indian insolvency regime

Abstract

Pre-packaging allows a distressed company to negotiate a plan with its creditors and a purchaser before entering formal insolvency proceedings. By allowing the terms of a plan to be negotiated before formal proceedings, pre-packs provide a quick and discreet way of completing the insolvency resolution process. The speed and confidentiality offered by pre-packs have made them prevalent in the United Kingdom and the United States, however, these advantages come with trade-offs. Creditors’ voting rights under the regular insolvency resolution process are circumvented by the pre-pack process. The US has two pre-pack processes, one that requires creditor approval and another which does not. In the UK and the US, there has been opposition to regulating pre-packs that do not need creditor approval because reforms that increase creditor participation will reduce the speed associated with such pre-packs. In India, pre-packs have not evolved through the present regime as it does not allow for the assets of a debtor to be sold without its creditors’ approval. The Insolvency and Bankruptcy Board of India is considering introducing pre-packs in the Indian regime and faces unique challenges because of some of the features in India’s insolvency regime. Insolvency law in India prohibits the participation of a company’s directors and creditors in the pre-pack process. Indian insolvency law also has broad avoidance provisions which can complicate the implementation of pre-packs. This paper discusses these challenges and uses the experience of the UK and the US to suggest a framework for the introduction of pre-packaged insolvency in India. After evaluating the pre-pack regimes in the UK and the US, we conclude that it would be optimal for India to retain creditor protections and require creditor approvals in its pre-pack regime. This would ensure that pre-packs can be discreetly implemented and also avoids the disenfranchisement of creditors.