The new insolvency and bankruptcy code (IBC) has been often criticised for low recovery rate. But it is a new law and as the law stabilises, there will be more favorable results
The new insolvency and bankruptcy code (IBC) has completed a successful 5-year journey. The code has been often criticised for low recovery rate. But it is a new law and as the law stabilises, there will be more favorable results. Here are some of the key outcomes:
Operational creditors make the most by triggering IBC
Unlike popular perception of financial creditors or lending banks triggering the IBC code for taking defaulters to the cleaners, it is the operational creditors, who have utilised the code for getting their money back. Operational creditors are vendors and suppliers of goods and services. Employees and the factory workers are also part of operational creditors. Out of the total admitted cases, 2,225 were initiated by the operational creditors followed by financial creditors with 1,875 cases by March 2021. Part of the reason for operational creditors invoking IBC more aggressively was the lower threshold for default at Rs 1 lakh. This limit has been changed to Rs 1 crore post the outbreak of the pandemic.
More liquidation than resolution and restructuring
Most of the cases under the IBC have ended in liquidation, which means selling the assets of the company as junk. Out of the total disposed off cases of 2,653, almost half the cases resulted in liquidation. The approval of a resolution plan was in only 13 per cent of cases. The higher liquidation was also because the banks transferred most of their bad stock including old written-off cases to IBC. Without an IBC mechanism, the bankers had always feared the CBI, CVC and CAG and avoided disposing off bad assets from books.
Real estate & construction biggest sector facing bankruptcy proceedings
Apart from manufacturing, which ruled with 41 per cent of the admitted cases under IBC, sectors like real estate and construction had the second largest share with 30 per cent. Part of the reason was the combination of Demonetisation, GST and RERA. The three policy initiatives impacted smaller firms the hardest. The slowdown in the economy, which coincided with the IBC reforms, also affected the sales of the real estate sector.
Deadline breach a norm
The IBC had set a deadline of T270 days for the resolution of a default case by way of restructuring or liquidation. There was an initial 180 days and 90 days of additional time for any delay. More than 80 per cent of the admitted cases have overshot the 270 days deadline for resolution. The deadline breach was expected as the law was new and there were many challenges because of non-corporation by defaulters and also litigations. Now many of the cases or interpretations are settled by various courts. There is now a new deadline of 330 days, which is more realistic given the counter bids and the practical difficulties in resolving complex cases.