Out-of-court deals gain traction as lenders, companies look to avoid IBC

Out-of-court settlements in cases of loan default are gaining traction among both creditors and debtors as parties are looking for ways to avoid initiation of Insolvency and Bankruptcy Code (IBC).
According to the Insolvency and Bankruptcy Board of India (IBBI), 23,417 applications for initiation of the Corporate Insolvency Resolution Process (CIRP), having underlying default of ₹7.31 lakh crore, were resolved even before their admission, as on September 31.

The development comes amid growing concern among debtors about losing control of the companies under the CIRP and the total time taken in the resolution process. Once the CIRP is invoked, the company board is dissolved and taken over by a committee of creditors. The lenders then appoint a resolution professional to manage the company and its resolution process.

Out-of-court settlements typically include debt restructuring along with infusion of some fresh capital to keep the business going. These only work in cases where the company has decent cash flows and a clean governance record. "We are seeing increased demand for out of court services including financial restructuring, one-time settlements and sale of stressed assets," said Nikhil Shah, managing director, Alvarez & Marsal. "Creditors and investors are concerned with the resolution timelines for insolvency cases which are stretching now to two-three years,"

A senior bank executive said the CIRP is time consuming, which often leads to further deterioration of assets, impacting the recovery value. Creditors are mindful of the steep haircuts they may be subject to under IBC, say market participants.