resolving insolvency outside of court to get an advantage

Prior to enacting more recent regulations like cross-border insolvency standards, the government would enhance and restructure the existing out-of-court bankruptcy resolution procedures, a senior official said. The official said that the goal is to improve the procedures’ robustness and efficiency in order to lessen the necessity for judicial intervention and speed up resolution.

The official stated, “The out-of-court settlement process needs to be refined in order to aid and supplement the cross-border insolvency processes as resolutions would be expedited.” The revised procedure will be incorporated into the Insolvency and Bankruptcy Code (IBC) in the upcoming months, the official continued.

There isn’t currently a strong legislative structure in the IBC to enable out-of-court settlements. According to experts, the absence of a formal framework hinders talks between debtors and creditors, both domestically and internationally, making it difficult to come to an agreement across several legal systems.

The bankruptcy of Jet Airways serves as a clear illustration of this, since creditors filed petitions to start the bankruptcy process against the corporate debtor (CD) in both India and the Netherlands. By a ruling from the NCLT Mumbai Bench back in 2019, separate procedures in the Netherlands court were first deemed null and invalid; but, subsequently, a “joint” corporate insolvency resolution process (CIRP) was authorized in cooperation with the Dutch creditors. According to the IBC, the whole procedure took over two years to finish, far longer than the required 330 days.

Therefore, they contend that adding certain clauses to the IBC that allow and govern out-of-court settlements,, including cross-border aspects, may aid in standardizing these procedures. According to Vatsal Gaur, a partner at King Stubb & Kasiva, “legislation could outline the steps, documentation, and approvals required, making it easier to manage and execute such settlements.”

According to FE’s report on February 20, the Corporate Affairs Ministry intends to expedite the insolvency process in several instances and reduce the tribunals’ burden by implementing the Creditor-led Resolution Process (CLRP), an out-of-court settlement procedure, in the next months.

According to reports, the financial creditors would start the CLRP as soon as the corporate debtor (CD) entered default, with the adjudicating authority (AA) or the NCLT having the least amount of influence.

The creation of such a framework was suggested by an expert committee that the Insolvency and Bankruptcy Board of India (IBBI) appointed last year. In contrast to the 330-day timeframe under the CIRP, the committee has proposed that the CLRP be finished in a total of 165 days.

Since there is simply an initiation to the NCLT and the IBBI and no formal admission procedure, the admission step is omitted in the CLRP. In this instance, the NCLT’s involvement is restricted to resolution plan approval.

The suggested CLRP, according to Dhananjay Kumar, Partner at Cyril Amarchand Mangaldas, is “quite apt” for out-of-court settlements, which will also assist in international settlements. Otherwise, out-of-court settlements lack the support of a court order; consequently, in the event of a violation, standard civil/DRT remedies take precedence, which is slow and reduces the amount of money that creditors may collect. “The CLRP will be more easily enforceable because it provides for a court order approving the resolution plan,” Kumar added. “Moreover, the CLRP gives the RP avoidance powers that are not otherwise available in out-of-court restructuring processes.”

But some experts point out that in cross-border situations, different nations have different bankruptcy laws, which can cause ambiguity and inconsistent outcomes in out-of-court agreements. As a result, unless specific bilateral agreements are in place, out-of-court agreements reached in India might not be automatically recognized or enforceable in other jurisdictions.

India may therefore sign additional bilateral or multilateral agreements to guarantee the acceptance by both parties and the implementation of extrajudicial settlements. Experts claim that such agreements would significantly lessen the legal ambiguity that presently impedes cross-border bankruptcy remedies.

According to Gaur of King Stubb & Kasiva, India could increase its involvement in global insolvency networks such as the Model Law on Cross-Border Insolvency (MLCBI) of the United Nations Commission on International Trade Law (UNCITRAL). This would help bring in-country out-of-court settlements into compliance with international standards.

The “principle of recognition” of the UNCITRAL Model Law makes it easier to recognize judicial actions in other countries, reduces delays, and encourages effective conflict settlement. It makes simultaneous and parallel processes possible. Additionally, international creditors and debtors are entitled to join in court proceedings happening in another country under the Model Law’s “principle of access.”

Dutch creditors in the Jet Airways case had difficulties obtaining their claims from the bankrupt airline since India has not yet ratified the UNCITRAL MLCBI. According to experts, its inclusion in the IBC would allay worries about international creditors.