The Insolvency and Bankruptcy Code (IBC) of India, since its inception in 2016, has made considerable progress in establishing an effective insolvency resolution framework. However, it has faced challenges in implementation, especially during the economic slowdown caused by the COVID-19 pandemic.
- Liquidated Firms’ Assets: Firms that ended up in liquidation under the IBC had assets amounting to only 5% of the claims made by various debtors. This indicates a significant shortfall in the value of assets available to meet creditors’ claims.
- Realization from Resolutions: The realization by claimants from successful resolution plans was 32.84%. This figure reflects the amount recovered by creditors (including lenders) through the resolution process, which is significantly higher than what is recovered through liquidation.
- Total Claims and Asset Values: As of September 2023, there were 2,249 corporate debtors with liquidation orders, of which 187 had admitted claims exceeding Rs 1,000 crore. The total aggregate claim for these firms was Rs 843,000 crore, but the assets valued only at about Rs 43,000 crore.
- Overall Liquidation Trend: The share of liquidations in the total closure of IBC cases decreased from nearly 60% in December 2019 to 44% by September 2023. This decline indicates a shift in the outcomes of insolvency cases.
- Economic Conditions and Asset Erosion: Many companies entering the Corporate Insolvency Resolution Process (CIRP) had already experienced significant asset erosion, often valuing assets at around 7% of the outstanding debt. This pre-existing deterioration often made restructuring or revival unfeasible, leading to liquidation.
- IBC’s Resolution Orientation: The IBC is primarily resolution-oriented, where liquidation is considered a last resort. If the resolution stage fails, the assets are unlikely to fetch much value during liquidation.
- Closure Methods: Around 45% of the total cases admitted into insolvency ended in liquidation as of September 2021, 2022, and 2023. The remaining cases were resolved through approval of resolution plans, settlement, appeal, or withdrawal.
- Comparison with Previous Regimes: Under the IBC, stressed companies have fared better compared to previous regimes like the Sick Industrial Companies Act (SICA) and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI). For example, total recoveries under SARFAESI in 2021-22 were Rs 27,349 crore, while under the IBC, the amount recovered was Rs 47,421 crore in the same period.
- Lenders’ Outlook: There has been a shift in lenders’ focus from merely recovering debt to resolving insolvency efficiently and transparently.
These data points reflect the evolving nature of insolvency resolution in India, highlighting the importance of timely and efficient mechanisms for maximizing stakeholder value. While the IBC has improved recovery rates compared to previous regimes, there remains significant room for improvement, particularly in ensuring value maximization and reducing the time taken for resolutions.