According to a recent publication of the Insolvency and Bankruptcy Board of India, 2023-24 saw a record approval of resolution plans — 269 cases compared with 189 in the previous year.

In addition, the IBC also aided the rescue of 308 corporate debtors in FY24. Of these, 159 were rescued through withdrawal under Section 12A of the IBC, and 149 cases through orders of NCLT and NCLAT, where stakeholders withdrew the matter upon appeal/review/settlement by the stakeholders. This showcases a notable shift in the debtor behaviour towards early settlement.

To many, this is an indication of the effectiveness of the IBC in bringing distressed companies back on their feet.

However, the rising number of resolution plan approvals alone does not provide a comprehensive picture of the efficacy of the resolution process.

Creditors had to take substantial haircuts, with around 68 per cent of the value of admitted claims being written off. This brings out a critical concern regarding the financial outcomes for creditors within the IBC framework. While the objective of the IBC may be to preserve businesses, this goal should not come at the expense of creditors’ money.

Notably, the computation of amounts realized from approved resolution plans excludes several key components that affect overall financial recovery. For instance, the costs associated with the corporate insolvency resolution process (CIRP) are not accounted for, which can significantly impact the net value recovered by creditors. Also, future realisations such as equity stakes, recoveries from guarantees, funds infused into the corporate debtor, and capital expenditures by resolution applicants are also not included in the initial recovery figures. Without considering these factors, the true economic impact on creditors is unclear, potentially leading to an overestimation of the IBC’s effectiveness.

Timely resolution

As per IBBI, the entire resolution process, on average, is taking 679 days to conclude, significantly exceeding the prescribed timeline of 330 days. These delays stem from institutional shortcomings and procedural inefficiencies and from the tendency of multiple stakeholders with competing interests to engage in parallel litigation. This often contributes to the further erosion of the assets of the corporate debtor, aggravating the financial distress that the IBC aims to mitigate.

Cases resolved within shorter timeframes tend to yield higher recovery rates, demonstrating the efficacy of swift resolutions in preserving asset value. Conversely, prolonged resolution periods coincide with diminished recovery rates, highlighting the detrimental impact of delays on the financial outcomes for creditors.

In FY24, insolvency resolutions addressed claims totalling approximately ₹1.7-lakh crore, an increase from ₹1.5-lakh crore in FY23. According to independent estimates by ICRA, the average duration for completing a CIRP that results in a resolution plan has risen to 843 days in FY24, up from 831 days in FY23. Furthermore, the haircuts taken by creditors have increased significantly, standing at 73 per cent in FY24 compared to 64 per cent in the previous fiscal.

From a liquidation point of view, liquidation orders were issued for 446 corporate debtors in FY24, up from 400 in FY23. The proportion of CIRPs ending in liquidation remains high, accounting for around 45 per cent of all concluded CIRPs since the inception of IBC.

The persistent delays and increasing haircuts in insolvency resolution underline systemic inefficiencies within the IBC framework. Despite resolving insolvency, the extended timelines and escalating creditor losses indicate a need for robust reforms to expedite processes and enhance financial recoveries under IBC.

The positive side

A report published by IIM Ahmedabad in August 2023 highlighted those enterprises that went through the insolvency resolution process showed significant performance improvements post-resolution, on metrics such as profitability, liquidity, activity and turnover. This positive trend indicates the IBC’s objective of preserving and revitalising distressed businesses is being met.

To improve this further, systemic reforms are needed to expedite the resolution process. Enhancing the capacity and efficiency of the NCLT and NCLAT, implementing stricter timelines for case adjudication and discouraging frivolous litigation through appropriate legislative and procedural safeguards are essential steps.

(The authors are advocates at Trinity Chambers, Delhi)

Published on June 16, 2024