New Delhi, July 20: A recent order of the National Company Law Appellate Tribunal (NCLAT) has rekindled the debate over what is the best option for banks and other creditors to recover their dues—resolution of the case monitored by court or out of court settlement with the lenders.

NCLAT, which earlier this week allowed withdrawal of a case and allowed Burda Druck India Pvt. Ltd., a corporate debtor, to run independently on settlement of dues with an operational creditor, highlights the way a large number of India’s bankruptcy cases are handled, Livemint reported.

Official data showed that since the Insolvency and Bankruptcy Code and the judicial ecosystem came into force in December 2016, the number of cases withdrawn on settlement of dues is as high as 157, while 221 and cases have been resolved under tribunals.

Experts said that settlement of dues allowed under the bankruptcy code with the consent of 90% of lenders has some advantages. These are quicker and are devoid of delay due to third party litigation but the flip side is 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, according to Sonali Mahapatra, a partner at Talwar Thakore & Associates, a Mumbai-based law firm.

“In the long run, there is no substitute to an efficient court process which will provide certain outcomes, since the ability to go to court to get such outcomes will in itself incentivise parties to settle out of court,” said Sonali.

To be sure, it is the threat of loss of control over the company under the bankruptcy process which acts as a catalyst to help shareholders and lenders stich together out of court settlements. This sentiment works only in cases where the company defaulted on repayment before 25 March when India went into a strict national lockdown to fight back against the coronavirus pandemic. 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 realisation value under the bankruptcy process good if there are adequate takers for the corporate debtor and judicial process is completed in a timely manner, says Ajay Shaw, Partner at DSK Legal, a law firm. 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 the company that is facing bankruptcy proceedings, it may go into liquidation.

“Lenders’ decision to pursue the IBC or any other options including taking the corporate debtor out of the IBC process will need to be analysed by the lenders from the perspective of calculating their realisable value and the time taken to get that value,” said Shaw.

Small operational creditors to companies such as their vendors and suppliers using the threat of management change under the bankruptcy code has been a big head ache for the policy makers. This forced the government to raise the minimum payment default threshold for triggering bankruptcy proceedings against a company to ₹1 crore from ₹1 lakh earlier this year.

The route of out of court settlement is more practical for operational creditors, compared to banks and financial institutions, said Mehak Suri, a practicing insolvency lawyer.

Banks may not find out of court settlement as useful, as the modalities involved in their lending is starkly different from that of operational creditors. “Once insolvency proceedings of a company are initiated at the behest of a bank, the likelihood of withdrawal or settlement would typically be less as compared to settling with an operational creditor, said Mehak.

However, given initiation of insolvency has been suspended for a period of six months for defaults occurring post 25 March, banks may find themselves opting for alternative methods for resolution of non-performing assets in the foreseeable future, she said.

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