Data | Poor recovery, increasing delays mar Insolvency & Bankruptcy Code resolution process

In Q4 of FY22, for the first time, the amount to be realised from the resolution process was lower than the liquidation value of assets

May 24, 2022 06:27 pm | Updated May 25, 2022 02:52 pm IST

When a business turns sick, it starts defaulting on its loan payments and the creditor tries to recover the debt through various means. The recovery process is essential on two counts – one, to recover the maximum amount possible from the defaulter, and two, to do it as soon as possible so that the amount can be freed-up to issue fresh credit. Poor recovery of claims and inordinate delays in resolving bad assets were the problems that plagued the older recovery mechanisms such as SARFAESI, Lok Adalats, and Debt Recovery Tribunals.

In 2016, the Insolvency and Bankruptcy Code was passed to tackle the mounting bad debts and to favour the creditor during the resolution process. While the IBC’s performance has been relatively better than the other recovery mechanisms, it suffers from similar systemic issues. For instance, of the 2,600 cases that were closed by December 2021, 55% ended in liquidation while only 16% were completed with proper resolution plans approved by the lender. The resolution process is also marred by delays. On average, over 700 days were taken in FY22 to complete a resolution process, against the stipulated deadline of 330 days. Moreover, during the fourth quarter of FY22, the amount to be realised from the resolution process was lower than the liquidation value of assets. Worryingly, the lenders continued to take steep haircuts. The haircut is the debt foregone by the lender as a share of the outstanding claim. In 100 out of 500 companies that saw proper resolutions, the haircuts were above 90%.

Reading the charts

Chart 1 shows the share of companies that were liquidated, approved, settled and withdrawn among the cases for which the resolution process was completed.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

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Chart 2 shows the number of days taken to complete the resolution process. The darker the red, the more the number of days taken. For instance, in FY22, it took 772 days to resolve cases involving companies that owed more than ₹1,000 crore to the lenders. The average number of days it takes 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 claims in a quarter. The chart also shows the actual value realised by the creditors through the resolution process as a share of outstanding claims. The wider the gap between the two values, the greater the impact of the insolvency process. The gap has been narrowing in recent months. In the January-March 2022 quarter, the amount realised fell below what the assets would have fetched if they were liquidated.

Chart 4 shows the share of haircuts taken by the lenders. Each circle denotes a company for which the resolution was approved. For instance, in close to 33 of 85 companies that owed more than ₹1,000 crore, lenders had to take above 90% haircuts.

“The biggest issue is the delays and a lot of it is due to the capacity of tribunals. The functioning of the NCLT [National Company Law Tribunal] during the COVID-19 pandemic has been a setback for the IBC. One part of the timeline that isn’t looked at so much is the delay in filing of admissions, where the clock starts. Several cases have been pending admission for over a year. And similarly, at the back end, the delay occurs between the approval of the resolution and the approval by the tribunal,” said Aparna Ravi, a partner at Samvad Partners, who was also a member of the Bankruptcy Law Reform Committee.

“The preference of IBC is resolution over liquidation. But it still can’t be resolved at any cost. If there is nothing viable about the business, then liquidation is the only option,” she said.

Source: IBBI

Also read: Deep haircuts: Comparing realisations with outstanding loans not reasonable to assess IBC effectiveness, says RBI DG

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