IBC nudging companies to resolve their financial distress early

The survey highlights delays in the NCLT due to the adjudication of interlocutory applications during the CIRP

- Krishna Yadav

The Economic Survey 2024-25 praised the Insolvency and Bankruptcy Code (IBC) for helping transform the behaviour of distressed companies, saying the law has acted as a deterrent, encouraging many firms to resolve their financial distress early in order to avoid the fallout of a resolution process.

The survey notes, "Thousands of debtors are resolving distress in the early stages...they are resolving when default is imminent, on receipt of a notice for repayment, but before filing an application, after filing application but before its admission, and even after admission of the application."

By March 2024, 28,818 applications for initiation of corporate insolvency resolution processes (CIRPs) of corporate debtors (CDs) having underlying defaults of ₹10.2 trillion were withdrawn before their admission, reflecting a significant shift in debtor behaviour driven by the deterrent effect of the IBC, the survey, tabled in Parliament on Friday, said.

The survey also discusses the outcomes of the IBC, noting that by September 2024, "1,068 resolution plans approved under the IBC have helped creditors recover ₹3.6 trillion, which is 161% of the liquidation value and 86.1% of the fair value (based on 964 cases where fair value was estimated)."

Creditors experienced a haircut of around 14% relative to fair value and 69% compared to admitted claims.