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Operational creditors file most of bankruptcy cases below 1 cr

The Insolvency and Bankruptcy Board of India, in its latest quarterly bulletin, said about 80% of bankruptcy proceedings involving default of less than Rs1 crore were initiated on operational creditors.Premium
The Insolvency and Bankruptcy Board of India, in its latest quarterly bulletin, said about 80% of bankruptcy proceedings involving default of less than Rs1 crore were initiated on operational creditors.

  • Around three-fourths of all such cases resulted in liquidation of the corporate debtor
  • Over half of the 4,376 cases initiated under the Insolvency and Bankruptcy Code till 31 March 2021 were filed by operational creditors

NEW DELHI : Operational creditors such as vendors have filed the bulk of bankruptcy cases so far involving payment defaults of less than 1 crore, while financial institutions dragged businesses to tribunals for defaults of up to 10 crore, according to official data.

The Insolvency and Bankruptcy Board of India (IBBI) said in its latest quarterly bulletin that about 80% of bankruptcy proceedings involving a default of less than 1 crore were initiated by operational creditors, while 80% of the cases with defaults of over 10 crore were initiated on applications by financial creditors.

Bankruptcy cases filed by operational creditors accounted for over half of the 4,376 cases initiated under the Insolvency and Bankruptcy Code till 31 March 2021, while around 43% of the cases were triggered by financial creditors. The remaining cases were filed by the companies that were on the brink of financial collapse.

The dominance of bankruptcy cases by operational creditors, especially over smaller defaults, reflect how suppliers are struggling with delayed payments from corporate clients—a trend that has only been aggravated during the second wave of the coronavirus infections. Several small firms said their payment cycle got prolonged during the second wave of the pandemic.

Around three-fourths of all bankruptcy proceedings initiated by operational creditors resulted in liquidation of the corporate debtor, and have been concluded. In case of proceedings triggered financial creditors that have been concluded, nearly half of the businesses have faced liquidation. IBBI said in the case of 79% of all ongoing bankruptcy proceedings, the 270-day time frame specified under the law for finding a resolution have been breached. This is owing to litigation involving shareholders and potential investors.

Prolonged litigation derails operations of the corporate defaulter, lets assets idle and lose value besides leading to job losses. To address this, the central government recently brought out a new resolution scheme called ‘pre-pack’, which is a hybrid of formal and informal, out-of-court restructuring. However, the scheme is restricted to only cases involving defaults of up to 10 lakh. If successful, the pre-pack scheme is likely to prompt the government to consider raising the threshold to cover larger defaults, too.

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