Economic Survey 2025: IBC nudging companies to resolve their distress early

The Economic Survey 2024-25 lavished praise on the Insolvency and Bankruptcy Code (IBC) for transforming the behaviour of distressed companies, highlighting that the law has acted as a deterrent, encouraging many firms to resolve their financial distress early in order to avoid the consequences 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insolvency resolution processes (CIRPs) of corporate debtors (CDs) having underlying defaults of ₹10.2 trillion were withdrawn before their admission, reflecting a significant shift in debtor behaviour driven by the deterrent effect of the IBC, the survey, tabled in parliament on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. Additionally, 79 corporate debtors were sold as going concerns during liquidation, resulting in a recovery of ₹3,674.1 crore from claims totalling ₹1.4 trillion.

Also read | SBI-led committee to be set up to formulate new list of large stressed accounts with banks for resolution under IBC

The survey commends the IBC for fostering several benefits, including reduced forex hedging by firms, lower bond credit spreads, and improved access to credit for exporters. It states that “the introduction of the new bankruptcy law increased the likelihood of currency hedging by 13.7% for firms that were previously highly exposed to currency mismatches,” indicating better risk management.

The IBC has been successful across various sectors, with “resolutions under the Code…spanning large steel manufacturing companies and real estate projects to small FMCG companies.” The survey also notes that out of 12 large accounts referred by the RBI for resolution, “10 have been successfully resolved,” showing the Code’s broad applicability and effectiveness.

the IBC was introduced in 2016 to expedite bankrupcty proceedings.

From FY17 to FY20, credit spreads for non-financial firms decreased, which the survey identifies as a key indicator that the IBC is helping build investor confidence in India’s bond market. However, it also highlights that “the bond market is currently dominated by high-rated (AAA and AA) bonds, which account for over 85% of all issuances.” To foster growth in the bond market and attract investment in lower-rated bonds, continued investor confidence in the IBC is essential.

Also read | No IBC amendment for real estate sector; regulations to act as sandbox

The survey also emphasized the positive impact on exporting firms, noting that a study of 4,434 firms between 2000 and 2020 found that “exporting firms in India have benefited from the bankruptcy reform law, gaining better access to credit and overcoming financial constraints.”

The Insolvency and Bankruptcy Code (IBC) was introduced in India primarily to address the growing problem of non-performing assets (NPAs) in the banking system by providing a time-bound and efficient mechanism to resolve insolvency cases involving distressed companies, thereby maximizing the recovery value for creditors and facilitating a quicker resolution process compared to previous methods.

To handle insolvency resolutions and related issues, the National Company Law Tribunal (NCLT) was established as a quasi-judicial body to resolve disputes within Indian companies, addressing mismanagement and malpractices.

However, the survey highlights delays in the NCLT due to the adjudication of interlocutory applications during the CIRP. These applications, filed during the pendency of cases, involve procedural matters such as appointing an insolvency professional, considering delayed claims, forming the Committee of Creditors (CoC), and addressing frivolous claims.

Also read | Small debt dominates bulk of settlement under IBC

The survey recommends a review of the NCLT’s rules and procedures as an adjudicating authority. It suggests implementing separate rules for the NCLT’s role under the Code to provide greater clarity on procedural matters and improve efficiency. This is necessary as the current structure does not fully support the non-adversarial resolution intended for insolvency cases.

As of September 2024, the NCLT operates with 30 courts and 16 benches, led by the President and supported by 31 judicial and technical members. By July 2024, the NCLT had adjudicated 34,690 cases under the IBC, with a 98% adjudication rate. However, 2,593 cases were still awaiting admission, and 4,723 cases remained pending after admission.

Looking ahead, the survey stresses the need to improve operational efficiency, particularly for MSMEs. It highlights that “legal costs can prove to be substantial” for MSMEs and suggests solutions like pre-pack arrangements, strengthening the skills of resolution professionals, and reducing judicial delays.

One key concern the survey raises is delays in admission, as it allows defaulting debtors to retain control, leading to risks like asset transfers and value erosion. “Delays in admission are of particular concern since, until admission, the company continues to be controlled by the defaulting debtor,” the survey notes.

And read | Mint Explainer: How can voluntary group insolvency smoothen IBC proceedings?

To address these issues, the survey proposes using technology and an integrated platform to streamline the process. It also suggests that “a voluntary mediation mechanism…may help address default and hence obviate the need for admission” in cases filed by operational creditors. These steps, the survey says, would help speed up the insolvency process and reduce delays, improving the overall effectiveness of the IBC in resolving distressed companies.

The survey also suggests that the financial system, including digital credit repositories and the information utility (IU) under the IBC, should be leveraged to verify debt and default, especially for financial creditors. Developing such a service could speed up application admissions and be monetized. Allowing IU records as conclusive proof of default would support this.

The Economic Survey 2024-25 lavished praise on the Insolvency and Bankruptcy Code (IBC) for transforming the behaviour of distressed companies, highlighting that the law has acted as a deterrent, encouraging many firms to resolve their financial distress early in order to avoid the consequences 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. Additionally, 79 corporate debtors were sold as going concerns during liquidation, resulting in a recovery of ₹3,674.1 crore from claims totalling ₹1.4 trillion.

Also read | SBI-led committee to be set up to formulate new list of large stressed accounts with banks for resolution under IBC

The survey commends the IBC for fostering several benefits, including reduced forex hedging by firms, lower bond credit spreads, and improved access to credit for exporters. It states that “the introduction of the new bankruptcy law increased the likelihood of currency hedging by 13.7% for firms that were previously highly exposed to currency mismatches,” indicating better risk management.

The IBC has been successful across various sectors, with “resolutions under the Code…spanning large steel manufacturing companies and real estate projects to small FMCG companies.” The survey also notes that out of 12 large accounts referred by the RBI for resolution, “10 have been successfully resolved,” showing the Code’s broad applicability and effectiveness.

the IBC was introduced in 2016 to expedite bankrupcty proceedings.

From FY17 to FY20, credit spreads for non-financial firms decreased, which the survey identifies as a key indicator that the IBC is helping build investor confidence in India’s bond market. However, it also highlights that “the bond market is currently dominated by high-rated (AAA and AA) bonds, which account for over 85% of all issuances.” To foster growth in the bond market and attract investment in lower-rated bonds, continued investor confidence in the IBC is essential.

Also read | No IBC amendment for real estate sector; regulations to act as sandbox

The survey also emphasized the positive impact on exporting firms, noting that a study of 4,434 firms between 2000 and 2020 found that “exporting firms in India have benefited from the bankruptcy reform law, gaining better access to credit and overcoming financial constraints.”

The Insolvency and Bankruptcy Code (IBC) was introduced in India primarily to address the growing problem of non-performing assets (NPAs) in the banking system by providing a time-bound and efficient mechanism to resolve insolvency cases involving distressed companies, thereby maximizing the recovery value for creditors and facilitating a quicker resolution process compared to previous methods.

To handle insolvency resolutions and related issues, the National Company Law Tribunal (NCLT) was established as a quasi-judicial body to resolve disputes within Indian companies, addressing mismanagement and malpractices.

However, the survey highlights delays in the NCLT due to the adjudication of interlocutory applications during the CIRP. These applications, filed during the pendency of cases, involve procedural matters such as appointing an insolvency professional, considering delayed claims, forming the Committee of Creditors (CoC), and addressing frivolous claims.

Also read | Small debt dominates bulk of settlement under IBC

The survey recommends a review of the NCLT’s rules and procedures as an adjudicating authority. It suggests implementing separate rules for the NCLT’s role under the Code to provide greater clarity on procedural matters and improve efficiency. This is necessary as the current structure does not fully support the non-adversarial resolution intended for insolvency cases.

As of September 2024, the NCLT operates with 30 courts and 16 benches, led by the President and supported by 31 judicial and technical members. By July 2024, the NCLT had adjudicated 34,690 cases under the IBC, with a 98% adjudication rate. However, 2,593 cases were still awaiting admission, and 4,723 cases remained pending after admission.

Looking ahead, the survey stresses the need to improve operational efficiency, particularly for MSMEs. It highlights that “legal costs can prove to be substantial” for MSMEs and suggests solutions like pre-pack arrangements, strengthening the skills of resolution professionals, and reducing judicial delays.

One key concern the survey raises is delays in admission, as it allows defaulting debtors to retain control, leading to risks like asset transfers and value erosion. “Delays in admission are of particular concern since, until admission, the company continues to be controlled by the defaulting debtor,” the survey notes.

And read | Mint Explainer: How can voluntary group insolvency smoothen IBC proceedings?

To address these issues, the survey proposes using technology and an integrated platform to streamline the process. It also suggests that “a voluntary mediation mechanism…may help address default and hence obviate the need for admission” in cases filed by operational creditors. These steps, the survey says, would help speed up the insolvency process and reduce delays, improving the overall effectiveness of the IBC in resolving distressed companies.

The survey also suggests that the financial system, including digital credit repositories and the information utility (IU) under the IBC, should be leveraged to verify debt and default, especially for financial creditors. Developing such a service could speed up application admissions and be monetized. Allowing IU records as conclusive proof of default would support this.