Out-of-court insolvency resolution to get a leg up

The government will redefine and strengthen the out-of-court processes for bankruptcy resolution, before introducing newer rules like cross-border insolvency norms, a senior official said. The idea is to make the processes more efficient and robust, so that the need for involvement of courts could be reduced, and pace of resolution is quickened, the official added.

“The out-of-court settlement process has to be refined, in order to aid and supplement the cross-border insolvency processes as resolutions would be expedited,” the official said, while adding that the re-designed out-of-court settlement process would be made part of Insolvency and Bankruptcy Code (IBC) in the coming months.

At present, the IBC does not have a robust statutory framework supporting out-of-court settlements. The lack of a formal structure deters negotiations between domestic and international creditors, and debtors, making it challenging to reach a consensus across different legal systems, say experts.

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A stark example is the Jet Airways insolvency case – where creditors had filed applications against the corporate debtor (CD) for initiation of the insolvency proceedings both in the Netherlands as well as in India. Back in 2019, the NCLT Mumbai Bench, via an order, had initially declared separate proceedings in the Netherlands court as void; but later had allowed for a “joint” corporate insolvency resolution process (CIRP) in coordination with the Dutch creditors. The entire process took around two-years to complete – way higher than the mandated 330 days timeline, according to the IBC.

Hence, introducing specific provisions in the IBC that facilitate and regulate out-of-court settlements involving cross-border elements can help standardise these processes, they say. “Legislation could outline the steps, documentation, and approvals required, making it easier to manage and execute such settlements,” said Vatsal Gaur, partner, King Stubb & Kasiva.

FE had reported on February 20 that the corporate affairs ministry is planning to introduce the creditor-led resolution process (CLRP) – an out-of-court settlement mechanism – in the coming months to put the insolvency process of many cases on fast track, and cut the workload of the tribunals.

The CLRP, as explained by sources, 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.

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 CIRP.

In the CLRP, the admission stage is eliminated as there is no formal admission process and only initiation of initiation to the NCLT and the IBBI. The NCLT’s role in this case is only limited to approval of the resolution plan.

Dhananjay Kumar, Partner, Cyril Amarchand Mangaldas said that the proposed CLRP is “quite apt” for out-of-court settlements, which will also help in global settlements. Out-of-court settlements, otherwise, don’t have the backing of a court order, and therefore, in case of a breach, usual civil/DRT remedies follow which take their own time and result in lower recovery for creditors. “The CLRP provides for a court order approving the resolution plan and therefore will be more easily enforceable,” said Kumar. “The CLRP also provides for avoidance powers with the RP which is not available otherwise in out of court restructuring processes.”

However, some experts highlight that in cross-border scenarios, different countries have varied legal frameworks for bankruptcy, which can lead to uncertainty and inconsistency in out-of-court settlements; and thus, out-of-court settlements agreed in India might not be automatically recognized or enforceable in other jurisdictions unless specific bilateral agreements are in place.

Therefore, India could enter into more bilateral or multilateral agreements that ensure the mutual recognition and enforcement of out-of-court settlements. Such agreements would greatly reduce the legal uncertainty currently impeding cross-border insolvency resolutions, say experts.

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King Stubb & Kasiva’s Gaur said that India could enhance its participation in international insolvency networks like the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency (MLCBI), which could help align domestic out-of-court settlements with international standards.

The UNCITRAL Model Law’s “principle of recognition” facilitates acknowledging court proceedings in foreign jurisdictions, helps in minimising delays, and promotes efficient dispute resolution. It enables parallel and concurrent proceedings. And the Model Law’s “principle of access” grants foreign creditors and debtors the right to participate in court proceedings held in another jurisdiction.

As India has not yet adopted the UNCITRAL MLCBI, Dutch creditors, in the case of Jet Airways, faced challenges in recovering claims from the insolvent airline. Experts say its introduction in the IBC would address foreign creditors’ concerns.