Out of court settlement becomes popular, as parties refrain from IBC proceedings

In cases of loan default, out-of-court deals are becoming the preference among creditors and debtors as parties look for ways to avoid initiation of the Insolvency and Bankruptcy Code (IBC).

According to the Insolvency and Bankruptcy Board of India (IBBI), as of September 31, 2022, 23,417 Corporate Insolvency Resolution Process initiation applications, with an aggregate default amount of Rs 7.31 lakh crore were resolved before their admission.

The development comes as debtors become increasingly concerned about losing control of companies under the CIRP and the length of the resolution process.

When the CIRP is initiated, the company’s board of directors is dissolved and replaced by a committee of creditors. Following that, the lenders appoint a resolution professional to the company and its resolution process.

Out-of-court settlements generally include debt restructuring as well as the injection of new capital to keep the business operational. This only work if the company has good cash flows and a good governance record.

According to a senior bank executive, the CIRP is time-consuming, which frequently leads to further degradation of assets, lowering the recovery value. According to market participants, creditors are wary of the steep haircuts that may be imposed under IBC.

Creditors and investors are primarily concerned about the insolvency resolution timelines, which extended to two to three year

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