83% of default cases getting resolved before going into CIRP: Economic Survey

The Insolvency and Bankruptcy Code (IBC) has brought about significant behavioural changes among the creditors and debtors thereby redefining debtor-creditor relationship, says the Economic Survey Report 2020-21.

According to the report, the inevitable consequence of a resolution process (the control and management of the firm move away from existing promoters and managers, most probably, forever) deters the management and promoter of the firm from operating below the optimum level of efficiency.

“Further, it encourages the debtors to settle default expeditiously with the creditor at the earliest, preferably outside the Code. There have been many instances where debtors have been settling their debts on their own or settling immediately on the filing of an application with the National Company Law Tribunal (NCLT) before it is admitted,” says the report.

Quoting numbers, the Economic Survey pointed out that since the enactment of the Code in 2016, 18,892 applications were dealt with, out of which 14,884 cases involving defaults of Rs 5.15 lakh crore were withdrawn by September 2020 from various benches of the NCLT, before these applications were admitted by the Adjudicating Authority and 897 processes were closed mid-way by December 2020.

“These figures indicate that almost 83% of the cases are getting resolved on the way, before the official commencement of the corporate insolvency resolution process under the Code on account of behavioural change among the defaulting debtors. Only 7% of the cases have undergone the entire process yielding either resolution or liquidation. Remaining 10% cases are still undergoing the process.

The Economic Survey further highlighted the following points:

Resolution: The Code has rescued 308 Corporate Debtors as on December 2020 through resolution plans. They owed Rs 4.99 lakh crore to creditors. However, the realisable value of the assets available with them, when they entered the CIRP, was only Rs 1.03 lakh crore. Under the Code, the creditors recovered Rs 1.99 lakh crore, which is more than 193 per cent of the realisable value of these CDs.

The recovery for financial creditors (FCs), as compared to their claims, was found to be more than 43% for all the years since the inception of the Code. The Code has facilitated the recovery of NPAs by banks. RBI data indicates that as a percentage of claims, scheduled commercial banks (SCBs) have been able to recover 45.5% f the amount involved through IBC for the financial year 2019-20, which is the highest as compared to recovery under other modes and legislations. Further, the amount recovered by SCBs under IBC was Rs 1.73 lakh crore which is more than all the amount recovered by all other alternative mechanisms combined for 2019-20.

Liquidation: Although the Code has rescued 308 Corporate Debtors (CDs), 1,112 CDs went into liquidation. The CDs rescued had assets valued at Rs 1.03 lakh crore, while the CD referred for liquidation had assets valued at Rs 0.43 lakh crore when they entered the CIRP. Thus, in value terms, around three fourth of distressed assets were rescued. Till December 31, 2020, 181 CDs have been completely liquidated which had outstanding claims of Rs 26,251 crore, but the assets valued at Rs 598 crore. Rs 607 crore were realised through the liquidation of these companies.

Time: The 308 CIRPs, which have yielded resolution plans by the end of December 2020, took on average 441 days for the conclusion of the process. Similarly, the 1112 CIRPs, which ended up in orders for liquidation, took on average 328 days for the conclusion. Further, 181 liquidation processes, which have closed by submission of final reports till 31 December 31 2020, took on average 380 days for closure. Similarly, 352 voluntary liquidation processes, which have closed by submission of final reports, took on average 370 days for closure.

Cost: Out of the total 308 CIRPs have yielded resolution plans until December 2020, the cost details are available in respect of 260 CIRPs. The cost works out on average 0.79% of liquidation value and 0.42% of resolution value.

A Snapshot: IBC in Numbers