NEW DELHI: Large corporates will soon have a facility for “out-of-court” insolvency resolution that will hinge on informal discussions among the stakeholders and may not even require open bidding for selection of resolution applicants, official sources said.
The scheme envisages minimal discretionary involvement by the National Company Law Board (NCLT), but will differ from the extant “prepackaged scheme” for MSMEs in retaining the creditors as the initiators of the process. Under the pre-pack scheme, launched in April 2021, the debtor MSMEs are allowed to trigger their own bankruptcy processes, and the promoters can retain control of the firms during the resolution period.
There was a plan to extend the debtor-led pre-pack scheme to larger companies as well, but this has been dropped as the lenders’ community found it impractical. As such, the pre-pack scheme for MSMEs hasn’t gained much traction among lenders as they apprehend that a decision to admit a case initiated by the debtor or voluntary haircut by them could later bring them under the scrutiny of investigation agencies.
The proposed creditor-led resolution process (CLRP) is expected to put the insolvency process on the fast track in many cases, and cut the workload of the tribunals, the sources said.
In January, Reserve Bank of India (RBI) Governor Shaktikanta Das had recommended that the government introduce pre-packaged insolvency scheme for corporates. He had noted that it could be a “potential game changer” in out-of-court resolution of disputes.
The CLRP will be an out-of-court resolution process, but would be initiated by the financial creditors, after the occurrence of default by the corporate debtor (CD), and with minimum interference of the adjudicating authority (AA) or the NCLT, the sources explained.
An expert-committee constituted by the Insolvency and Bankruptcy Board of India (IBBI) last year had recommended establishing such a mechanism. The committee has recommended the CLRP to be completed in a total of 165 days, which is much shorter than the 330-days -timeline under the Corporate Insolvency Resolution Process (CIRP).
In the CLRP, the admission stage is eliminated as there is no formal admission process and only intimation of initiation to the NCLT and the IBBI. The NCLT’s role in this case is only limited to approval of the resolution plan.
In terms of the settlement mechanism, the pre-pack scheme and CLRP are broadly similar – both require final approval from NCLT, but differences exist.
Siddharth Srivastava, partner, Khaitan & Co, noted that under the pre-pack scheme, a base resolution plan is first required to be submitted by the existing promoters of the corporate debtor to the Committee io Credtors. But in CLRP, no such base resolution plan is required to be submitted. This may cause practical difficulties as the existing set of promoters may not be incentivized to cooperate in the process since there is no “absolute surety” about them retaining control of the firm, he said.
Currently, the pre-pack cheme exists for resolving financial stress among MSMEs – where default amount ranges between Rs 10 lakh and Rs 1 crore, but it has failed in ensuring out-of-court settlements, with only six cases being admitted under the scheme so far.
“The pre-pack scheme is similar to one time settlement , where creditors have to rely on heavy haircuts. It is tilted towards debtors, not financial credtors In case of large corporate defaults, bankers would be unwilling to take big haircuts and therefore would not take this route,” the source said.
Sudhir Chandi, partner, Resurgent Resolution Profesional said: “The scheme for MSMEs was a well-intended scheme but has failed to take off in a big way. While the objective was to have a simpler process, the banks are hesitant to take up any negotiated settlement involving heavy haircuts.”
The small borrowers are required to prove the viability of the proposal on technical and financial grounds with competence to handle the resolution plan as per the requirements of the lenders, which they are unable to do in most cases, say experts.
Anoop Rawat, partner, Shardul Amarchand Mangaldas & Co said: “Creditor led framework is expected to bring quicker results and be as effective as comparable processes as it provides the same effect as provided for a regular resolution process. At the same time, it involves lesser NCLT intervention. It is likely to increase recoveries and maximise the value of the corporate debtor.”
Source: The Financial Express
