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IBC proceeding v/s Out of NCLT settlement: Which one’s worth it?

February 26, 2020
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NCLT settlement

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This article is written by Animesh Tiwary.

Introduction

The recent resolution of RattanIndia Power has become one of the first resolutions of stressed power sector outside the IBC mechanism highlighting the significance of such deals to promoters as well as lenders as discussed further. The introduction of Insolvency and Bankruptcy Code (“IBC”), 2016 has brought about a paradigm shift in the sphere of corporate restructuring and debt resolution which has not been witnessed before. One of the most significant effects has been the behavioural change among the promoters. They are now approaching their creditors to address the soaring debt problem before they end up losing the control of their company, which has not been the case earlier. Now, there are two approaches to this problem- going through Corporate Insolvency Resolution Process (“CIRP”) under IBC or making a settlement (pre-admission or post-admission) with the creditors outside of the courts. Both the mechanisms have their own merits and challenges depending upon the interest of various stakeholders.

Need for out-of-court settlements 

Recent research data suggests that out of 21000 cases referred to National Company Law Tribunals (“NCLTs”) since inception of IBC, 10000 of them were settled by Tribunal and close to 8500 cases were withdrawn before admission since dispute was settled outside Tribunal. This highlights that there is a growing trend between the parties to prefer settlement among themselves outside the process rather than going in for CIRP especially when the amount involved is ‘small’ or the case is ‘less complex’. With the current number of 15000 cases pending at various stages in Tribunal overheating the whole system, the lenders are finding it more prudent to find a solution outside of NCLT. 

Advantages of out-of-court settlement vis-à-vis CIRP under IBC 

For creditors 

Therefore, operational creditors who are mainly SMEs and small vendors can expect better results from out of court settlements especially when amount of default is small

For promoters 

               Click Above

Concerns with out of court settlement 

Withdrawal of CIRP application 

Before admission 

Rule 8 of IBBI rules allowed Adjudicating Authority to permit the withdrawal of application on request made before its admission.

After admission 

Introduction of Section 12A 

Looking Ahead 

With deals such as Rattan India Power gaining momentum in IBC sphere, it is empirical to note the importance of foreign capital for ensuring success of any such process especially in the present environment of economic slowdown and liquidity crisis which is where the role of Asset Reconstruction Companies (ARCs) become important. They not only provide the promoters a way out in the form of much needed capital by acquiring debt but also helps in turning around the business. Recent trend suggests that majority of lenders, after forming the CoC, have agreed to such a proposal of settlement when they are offered amount greater than what they would receive through CIRP. This would lead to further growth of the nascent asset reconstruction sector and further the overall objective of debt resolution.


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