63 businesses find debt resolution in Sept quarter; recovery from dubious deals go up

In FY24, a record number of 269 resolution plans were approved by the tribunal, against 189 in the year before. (Photo: Mint)
In FY24, a record number of 269 resolution plans were approved by the tribunal, against 189 in the year before. (Photo: Mint)

Summary

  • In the eight years since the IBC came into force, 1,068 companies have been nursed back.

New Delhi: Sixtythree indebted  companies were given a new lease of life in the September quarter – nearly half the number of distressed businesses to avoid liquidation so far this year. 

The total number of firms saved under the Insolvency and Bankruptcy Code (IBC) this year is 121, official data showed.

In the eight years since the IBC came into force, 1,068 companies have been pulled back from insolvency, data released by IBBI on Monday showed.

Data also showed that bankruptcy action triggered by vendors and other service providers against their clients were fewer than those kicked off by lenders in FY23, FY24 and so far this financial year, a trend that would please policy makers. 

Concern over rising cases

The higher number of bankruptcy cases initiated by operational creditors was a concern as it showed the IBC was being used by vendors as a recovery mechanism. However, vendors are more interested in getting their supply terms met rather than in the debt resolution of those companies. 

The IBC is designed for salvaging companies with fresh investments and corporate restructure where needed or to liquidate companies that are unviable.

Also read: Bankruptcy code has helped rescue 109 businesses so far this fiscal year

In the first half of this financial year, 121 companies have managed to get resolution plans approved by the National Company Law Tribunal. In FY24, a record number of 269 resolution plans were approved by the tribunal, against 189 in the year before. 

IBBI has been finetuning its regulations to enable quicker decision making by the tribunal. The government in the meantime is drafting legislation to amend the IBC and bring more clarity into the code.

The government had in 2020 raised the threshold of payment default for initiating bankruptcy action from 100,000 to 1 crore. Vendors and service providers, who fall in the category of operational creditors, were predominant in initiating IBC action against defaulting companies in the six years upto FY22. 

Dues to operational creditors are typically lower than what companies owe financial institutions. 

Success in reversing dubious deals

Data also showed that success is slowly emerging in reversing dubious deals entered into by companies or their promoters just before their business slipped into bankruptcy. 

At the end of the September quarter, tribunals had ordered recovery of over 7,516 crore from such transactions, a 12% jump from the recovery ordered till the end of the June quarter. This is from 338 transactions that tribunals have reviewed, worth over 58,500. 

Also read: Continuous improvement to IBC key to 7-8% economic growth rate: CEA Nageswaran

At the end of June, tribunals had sanctioned recovery of 6,676.6 crore from such deals, known as ‘avoidance transactions.’ Debt resolution professionals have so far referred 1,326 transactions worth over 3.76 trillion to tribunals.

IBBI chairperson Ravi Mital said in the regulator’s quarterly update that avoidance transactions by former promoters and directors are one of the primary causes leading to their company’s financial distress and eventual landing in bankruptcy tribunals. 

“It is necessary to take these transactions seriously," Mital said, adding that creditors should keep an eye on the legal proceedings on such transactions.

 “Recovery from avoidance transactions would play a vital role in reducing haircuts to creditors. On a conservative scale, decision on avoidance transactions would add recovery to creditors by at least 10%," Mital said.

In cases where tribunals clear prosecution, lenders should approach the ministry of corporate affairs (MCA) or the IBBI and file a criminal complaint before designated special courts, the chairperson said in the update.  The regulatory review is expected to ensure that prosecution will be initiated only in serious cases. 

Mital also suggested that details of these transactions which reflect the company’s assets should be part of the competitive bidding process for fresh investors so that it gets accounted for in the bids received. 

Also read: NFRA begins work to overhaul audit norms

 

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