Economic Survey 2021-22: Insolvency And Bankruptcy Code Has Changed The Behaviour Of Corporate Debtors

The Economic Survey 2021-22 tabled today (31 January) in the Parliament has released a sort of report card on the outcomes of the Insolvency and Bankruptcy Code (IBC) enacted by the Modi government in 2016.

The fact that a Corporate Debtor (CD) may change hands has changed the behaviour of debtors, the Survey admits. ‘Thousands of debtors are resolving distress in the early stages of distress, either when the default is imminent, on receipt of a notice for repayment but before filing an application, after filing the application but before its admission, and even after admission of the application, and making best effort to avoid consequences of the resolution process,” it adds.

The IBC involves Corporate Insolvency Resolution Process (CIRP) which is a mechanism for the creditors of a corporate debtor to recover their assets. The goal of IBC is to resolve CDs in distress.

So far, it has rescued 421 CDs through resolution plans and referred 1,419 CDs for liquidation, combined value of both being Rs 2 lakh crore when they were admitted to CIRP. IBC succeeded in rescuing around 74 per cent of distressed assets.

Though the realisable value of the assets available with the 421 CDs was Rs 1.48 lakh crore, the resolution plans managed to realise Rs 2.55 lakh crore, over 172 per cent of the realisable value. However, these CDs owed Rs 7.94 lakh crore to creditors so only 32.11 per cent of the claimed amount could be rescued. This ‘reflects the extent of value erosion by the time the CDs entered CIRP, yet it is the highest among all options available to creditors for recovery,’ the Survey notes.

The time for resolution of these 421 CDs was on average 428 days. For liquidation, the time taken for resolution was marginally lower at 375 days on average.

As a consequence of IBC, two professions - the insolvency profession and the valuation profession that have professionalised insolvency services - are also rising in India. ‘The Code has opened possibilities of the resolution, including merger, amalgamation and restructuring of any kind, which often requires professional help. This has created markets for services of Insolvency Professionals, Registered Valuers, Insolvency Professional Entities and expanded the scope of services of Advocates, Accountants and other professionals,’ the Survey says.