A new facility for “out-of-court” insolvency resolution is being introduced for large corporates, allowing informal discussions among stakeholders and possibly not requiring open bidding for resolution applicants.
This scheme, called the creditor-led resolution process (CLRP), aims to expedite the insolvency process and reduce the tribunals’ workload. Unlike the existing pre-pack scheme for MSMEs, where debtors can initiate their own bankruptcy processes, the CLRP will be initiated by financial creditors. The CLRP is expected to minimize discretionary involvement by the National Company Law Board and can be completed in 165 days, much shorter than the current timeline under the Corporate Insolvency Resolution Process. However, there are practical differences between the CLRP and the pre-pack scheme, such as the absence of a base resolution plan requirement in the CLRP. Despite the existence of the pre-pack scheme for MSMEs, it has not resulted in many out-of-court settlements, with only six cases admitted so far.
The limited success is attributed to creditors being hesitant to accept negotiated settlements involving significant haircuts. In contrast, the creditor-led framework is anticipated to yield quicker results and be as effective as comparable processes, potentially increasing recoveries and maximizing the value of the corporate debtor while involving less NCLT intervention.