THE INSOLVENCY and Bankruptcy Code (IBC) was launched in 2016, with the aim to overhaul the corporate distress resolution regime. It was to protect the interests of small investors and the financial system where public monies are involved.
When a default in repayment occurs, creditors gain control over the debtor's assets and must take decisions to resolve insolvency. The IBC mooted completing the entire insolvency resolution within 180 days, with the possibility of extending the timeline, should creditors consent to it. For smaller companies, including startups with an annual turnover of Rs 1 crore, in case of insolvency, the whole exercise must be completed in 90 days, but the deadline can be extended by another 45 days. If debt resolution doesn't happen, the company goes for liquidation.
Time, Bench Strength & Valuation Concerns
Till September 2022, financial creditors had recovered only about 33 per cent of their claims in 553 corporate insolvency processes that were resolved. It took an average of 560 days to resolve 143 cases in 2021-22, while it had taken 468 days to resolve 120 cases in 2020-21. Moreover, 64 per cent of the ongoing insolvency cases have spilled beyond 270 days. While the RP (insolvency resolution professional) might want to improve on valuations with additional time for resolution, any further delay might lead to erosion in the asset valuations, as well as exodus of human capital in the enterprise. There is also a perception and worry about the lack of transparency in many IBC cases.
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