Economic Survey Highlights Delays In Insolvency Resolution Process Under IBC
Economic Survey Highlights Delays in Insolvency Resolution Process Under IBC
The Economic Survey of India, released on Friday, highlighted ongoing challenges with the Insolvency and Bankruptcy Code (IBC), particularly in terms of delays in resolving distressed companies. The Corporate Insolvency Resolution Process (CIRP) is currently taking an average of 582 days to complete, while the liquidation process averages 499 days.
These timelines significantly exceed the IBC's stipulated 180-day resolution period, which can be extended up to 330 days.
Notably, these figures do not account for the time taken for applications to be admitted or the periods excluded by the National Company Law Tribunal (NCLT), which typically averages 116 days per case. This exclusion represents approximately 64% of the original time allotted for the entire process.
The survey also pointed out that delays in admitting insolvency applications are a key bottleneck. While the IBC mandates a 14-day period for admission, operational creditors had to wait an average of 468 days in the Financial Year 2021 and 650 days in the Financial Year 2022.
As of September 2024, the average haircut for creditors under the IBC was 14% in relation to fair value, and 69% when compared to admitted claims. Despite these reductions, 1,068n resolution plans have resulted in creditors recovering ₹3.6 lakh crore, representing 161% of the liquidation value and 86.1% of the fair value in 964 cases where fair value was estimated.
The resolution process has also facilitated the continuation of operations for 79 corporate debtors through going-concern sales, with claims worth ₹1.4 lakh crore being resolved for ₹3,674.1 crore by liquidators.
The survey observed a shift in debtor behavior since the IBC's inception, with over 28,818 applications involving defaults totaling ₹10.2 lakh crore being withdrawn before admission as of March 2024. This trend suggests that companies are increasingly opting for early resolution strategies to avoid formal insolvency proceedings.
Further, the survey revealed that of the 12 major accounts referred for resolution by the Reserve Bank of India (RBI), 10 have been successfully resolved, demonstrating the efficacy of the IBC. The NCLT has adjudicated 34,690 out of 35,501 cases filed, achieving a 98% adjudication rate by July 2024. However, 2,593 cases are still awaiting admission, and 4,723 cases remain pending after admission.
The Economic Survey pointed out that delays in admission arise due to NCLT’s efforts to establish the existence of debt and default, as promoters file objections, and the need for substantiating evidence such as contracts and GST filings. Experts suggest that digital tools and the Information Utility (IU) under the IBC, which maintains records of financial transactions, could be leveraged to provide conclusive proof of debt and default, potentially streamlining the process and reducing delays.
The survey also proposed standardizing repetitive procedural tasks, such as the appointment of insolvency professionals and the constitution of the Committee of Creditors (CoC), to ease the burden on NCLT. To improve efficiency, the introduction of high costs for frivolous applications was recommended, as well as a voluntary mediation mechanism for operational creditors, which could resolve defaults without formal admission, thus helping reduce the backlog of cases.
