ICAI proposes special measures for insolvency resolution of defunct companies

ICAI has suggested implementation of specialized measures to the challenges posed by defunct companies in the corporate insolvency resolution process (CIRP) and streamline the insolvency resolution process. The Insolvency and Valuation Standards Board (I&VSB) of the Institute of Chartered Accountants of India (ICAI) has released a study report on the efficacy of the Insolvency and Bankruptcy Code (IBC), 2016, which highlights these challenges.
The report reveals that defunct companies, characterized by a lack of ‘going concern’ status or prior classification under the Board for Industrial and Financial Reconstruction (BIFR), disproportionately burden the CIRP mechanism, leading to delays and inefficiencies.

Current status

• Share in Resolutions: Defunct companies constituted 39% of resolved Corporate Insolvency Resolution Processes (CIRPs) as of September 2024.
• Recovery Rates: Creditors realized only 19% of admitted claims for defunct firms, compared to 33% for operational companies. However, recoveries still surpassed liquidation value by 150%, underscoring IBC’s advantage over liquidation.
• Resolution Timelines: Defunct companies took an average of 674 days to resolve —marginally faster than non-defunct firms (713 days). They also had fewer cases lingering beyond four years, suggesting quicker exits.

Challenges

1. Low Asset Value: Many defunct companies lack viable assets or have deteriorated operations, leading to poor bidder interest and lower recoveries.
2. Legacy Liabilities: Historical debts, pending litigation, and regulatory dues complicate resolution plans.
3. Limited Revival Potential: With no “going concern” status, restructuring is often unfeasible, pushing cases toward liquidation.
4. Data Gaps: Incomplete financial records hinder accurate valuation and delay processes.

The study highlights two extreme examples: Arhan Infratech and Fermos Engineering, which yielded 0% recovery for creditors despite admitted claims of ₹48.4 crore.

ICAI Recommendations

To tackle the challenges posed by defunct companies, the ICAI has proposed several key recommendations:

• Early Identification: The report emphasizes the need for early identification of defunct companies within the CIRP framework. This will enable insolvency professionals and adjudicating authorities to adopt a tailored approach from the initial stages of the process.
• Separate Handling: Recognizing that defunct companies require a different approach compared to operational entities, the ICAI suggests developing a distinct framework for handling their insolvency resolution. This could involve carving out a separate track within the existing IBC framework or establishing an alternative mechanism altogether.
• Swift Liquidation: In cases where the revival of a defunct company is deemed unfeasible, the report recommends expediting the liquidation process. This will help prevent further value erosion and free up resources that can be better utilized in resolving other insolvency cases.

The ICAI believes that the implementation of these recommendations will significantly enhance the efficiency of the CIRP process, reduce delays, and improve value realization for creditors. By adopting a more focused and streamlined approach towards defunct companies, the insolvency framework can better achieve its objectives of timely resolution and value maximization.

Also See: 40 insolvency resolution cases which resulted in 100% recovery