Lenders to debt-laden companies are increasingly opting for negotiated settlements with the defaulting borrowers as the absence of time-bound resolutions, significant haircuts on advances, and a mounting pile of unresolved cases combine to dim the allure of India’s dedicated bankruptcy courts.

“Looking at the sort of value that lenders are getting through the NCLT (National Company Law Tribunal) and the time taken for resolutions, the preferred route is to settle with the corporate debtor,” said the CEO of a large public-sector bank. “Although the code provides for a time limit for resolutions, cases are getting stretched by nearly two years and the time value of money is lost.”

Latest data published by the Insolvency and Bankruptcy Board of India (IBBI) showed that the percentage of cases withdrawn from bankruptcy tribunals was higher than those resolved under the mechanism.

The trend will likely accelerate, with the bankruptcy platform seemingly losing out due to the opportunity costs associated with the recoverable funds.


Plan nod in 459 days on average

IBBI data showed that of the 2,653 cases closed under corporate insolvency at the end of March 2021, 48% were liquidated, 16% of the cases withdrawn under section 12A, and only 13% exited the bankruptcy courts with a resolution. Section 12A of the Insolvency and Bankruptcy Code (IBC) allows the withdrawal of a bankruptcy application with the approval of 90% voting share of the committee of creditors (CoC).

At the end of FY21, 4,376 borrower accounts were admitted to the insolvency courts, while 1,723 cases were being heard and 2,653 cases closed. Of the closed accounts, 617 cases were settled, 411 withdrawn, and 1,277 ended up in liquidation. Only 348 of ended up with a resolution. Of the cases withdrawn, 152 were fully settled with the lenders that had taken the borrowers to bankruptcy courts. On average, 459 days were spent for approval of resolution plans at the tribunals, while another 351 days were needed to secure liquidation orders.

“Covid-19 barred the creditors for almost a year to invoke IBC against the corporate debtor. Even now, only the urgent matters are being taken up by NCLTs and the pendency has gone through the roof,” said Rajesh Narain Gupta, managing partner, SNG & Partners, a law firm. “Operational creditors are certainly exploring alternative ways to recover the outstanding amounts as most of them are themselves in a financial crisis and are willing to negotiate for less.”


Source link