Data | Poor collection, increasing delays hampering the Insolvency and Bankruptcy Code resolution process

In the fourth quarter of FY22, for the first time, the amount to be realized from the resolution process was lower than the liquidation value of the assets

In the fourth quarter of FY22, for the first time, the amount to be realized from the resolution process was lower than the liquidation value of the assets

When a business falls ill, it begins to default on its loans and the creditor tries to collect the debt through various means. The collection process is essential in two respects – one, to recover the maximum possible amount from the defaulter, and two, to do so as soon as possible so that the amount can be released to issue new credit. Poor debt collection and excessive delays in resolving uncollectible assets were the problems that plagued old collection mechanisms such as SARFAESI, Lok Adalats and debt collection courts.

In 2016, the Insolvency and Bankruptcy Code was adopted to combat the increase in bad debts and favor the creditor during the resolution process. Although the performance of IBC was relatively better than other recovery mechanisms, it suffers from similar systemic issues. For example, of the 2,600 files that were closed in December 2021, 55% ended in liquidation while only 16% were closed with appropriate resolution plans approved by the lender. The resolution process is also marred by delays. On average, it took more than 700 days in FY22 to complete a resolution process, versus the planned timeframe of 330 days. In addition, during the fourth quarter of FY22, the amount to be realized from the resolution process was less than the liquidation value of the assets. Worryingly, lenders continued to take straight haircuts. The haircut is the debt waived by the lender as part of the outstanding receivable. In 100 out of 500 companies that saw appropriate resolutions, the discounts were over 90%.

Read charts

Chart 1 shows the share of liquidated, approved, settled and withdrawn companies among the cases for which the resolution process has been completed. Since 2018, the majority of cases ended in liquidation in most quarters, while approved cases ranged between 15% and 25%.

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Chart 2 indicates the number of days required to complete the resolution process. The darker the red, the higher the number of days taken. For example, in FY22, it took 772 days to resolve cases involving companies that owed more than ₹1,000 crore to lenders. The average number of days needed to resolve such cases has increased dramatically over the past five years.

Chart 3 shows the value of assets if they were liquidated as a share of outstanding receivables in a quarter. The graph also shows the actual value realized by creditors through the resolution process as a share of outstanding debts. The greater the difference between the two values, the greater the impact of the insolvency process. The gap has narrowed in recent months. During the January-March 2022 quarter, the amount realized fell below what the assets would have earned had they been liquidated.

Chart 4 shows the share of haircuts taken by lenders. Each circle designates a company for which the resolution has been approved. For example, in nearly 33 out of 85 companies that owed more than ₹1,000 crore, lenders had to accept haircuts above 90%.

“The biggest problem is the delays and a lot of that is due to the capacity of the courts. How the NCLT works [National Company Law Tribunal] during the COVID-19 pandemic has been a setback for BAC. One part of the timeline that isn’t looked at so much is the delay in filing admissions, where the clock starts. Several cases have been awaiting admission for more than a year. And likewise, ultimately, the delay occurs between resolution approval and court approval,” said Aparna Ravi, a partner at Samvad Partners, who was also a member of the Corporate Law Reform Committee. bankruptcies.

“IBC’s preference is resolution over liquidation. But this still cannot be solved at any cost. If there is nothing viable in the business, liquidation is the only option,” she said.

Source: IBBI

Also Read: Deep Haircuts: Comparing Accomplishments with Ongoing Loans Not Reasonable to Evaluate IBC Effectiveness, Says RBI DG