A recent order of the National Company Law Appellate Tribunal (NCLAT) has rekindled the debate over the best option for banks and other creditors to recover their dues—a resolution monitored by the court, or an out-of-court settlement with lenders.
NCLAT, which had last week allowed withdrawal of a case, permitting Burda Druck India Pvt. Ltd, a corporate debtor, to independently settle dues with an operational creditor, highlights the way many bankruptcy cases are handled. The number of cases on settlement of dues that were withdrawn is as high as 157, since the Insolvency and Bankruptcy Code (IBC) and the judicial ecosystem came into force in December 2016, while 221 cases were resolved under tribunals.
Settlement of dues allowed under the bankruptcy code with the consent of 90% of lenders has some advantages, said experts. These are quicker and devoid of delays that can be caused by third-party litigation. However, the flip side is that they bind only the parties to the settlement and, therefore, are not effective where the financial difficulties of the corporate debtor involve a number of stakeholders, said Sonali Mahapatra, a partner at Talwar Thakore and Associates, a Mumbai-based law firm. “In the long run, there is no substitute to an efficient court process that will provide certain outcomes, as the ability to go to court to get such outcomes will in itself incentivise parties to settle out of court,” said Mahapatra.
The threat of loss of control over the company under the bankruptcy process acts as a catalyst for shareholders and lenders to opt for out-of-court settlements. This sentiment works only in cases where a company has defaulted on repayment before 25 March, when the covid-19 lockdown started. Lenders are barred by an ordinance issued in June from dragging companies to bankruptcy tribunals, where defaults happened after 25 March, for at least six months.
Banks may find the realization value under the process good if there are adequate takers for the corporate debtor and judicial process is completed in a timely manner, said Ajay Shaw, partner, DSK Legal. In many cases, where lenders have cleared a rescue plan, its implementation and payments to lenders have been delayed. Also, in cases where there are no takers for a stressed firm, it may go into liquidation.
Prathma Sharma contributed to this story.
