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Mint Explainer: Key trends shaping debt resolution under IBC

At the end of the June quarter, of the 6,811 cases admitted in the NCLT, 3,034 cases were initiated by financial creditors, accounting for 45% of the cases.. (Mint)
At the end of the June quarter, of the 6,811 cases admitted in the NCLT, 3,034 cases were initiated by financial creditors, accounting for 45% of the cases.. (Mint)

Summary

  • Under the IBC, in addition to operational and financial creditors, distressed companies can also initiate debt resolution action.

The Insolvency and Bankruptcy Code (IBC) that came into force in 2016 has helped clean up the balance sheets of businesses and lenders and changed the behaviour of corporate borrowers. The major users of the IBC to initiate bankruptcy action are financial creditors, such as banks and institutions, and operational creditors, such as suppliers to distressed companies. Mint takes a look at the latest trends in the operation of the code.

Who triggers bankruptcy action most under IBC?

Under the IBC, in addition to operational and financial creditors, distressed companies can also initiate debt resolution action. Official data show that financial creditors like banks and institutions and operational creditors like suppliers to distressed company are the major users of IBC in initiating bankruptcy action. At the end of the June quarter, of the 6,811 cases admitted in the National Company Law Tribunal (NCLT), 3,034 cases were initiated by financial creditors, accounting for 45% of the cases. Operational creditors initiated 3,369 cases and corporate debtor initiated 408 cases. In the initial years of IBC--FY18 to FY22, operational creditors were the largest class of stakeholders to initiate bankruptcy action. However, that has changed in FY23, when financial creditors overtook operational creditors in terms of the number of bankruptcy action initiated. That trend has also continued in the June quarter.

Why operational creditor-initiated bankruptcy proceedings are declining?

A key observation made by experts about the operation of IBC so far has been that many parties have attempted to use it as a tool for recovery of dues although IBC has been conceptualised as a forum to rescue viable companies and to liquidate unviable ones quickly before the value of their assets erodes. Experts believe that the jurisprudence evolved by courts and adjudicatory authorities over the years that the IBC should not be treated as a recovery mechanism is helping to change creditor behaviour. Also, the fact that operational creditors do not get to be part of the committee of creditors set up under a tribunal's watch to restructure the defaulting company is proving to be a disincentive for them to invoke IBC.

Why past transactions of bankrupt firms are being questioned?

Increasingly, resolution professionals are bringing the past questionable transactions of distressed companies under the scanner. The idea is to see if those transactions executed in the period when the company was facing financial troubles, but before its admission to NCLT for debt resolution, involved any financial irregularity or were meant to divert funds. The law allows a resolution professional to approach the tribunal to annul an undervalued transaction of the bankrupt company dating back up to two years in the case of related party transactions and up to one year in the case of others.

What is the extent of such transactions questioned by resolution professionals?

So far, 947 such ‘voidable’ transactions worth 2.95 trillion have been questioned by resolution professionals, of which 200 transactions worth 44,871 have been dealt with by the tribunals, and over 5,200 crore have been recovered, as per data from IBBI. In the June quarter, 76 cases involving 10,220 crore of allegedly questionable past transactions of insolvent companies have been taken to tribunals by resolution professionals.

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