The Insolvency and Bankruptcy Code (IBC), enacted in 2016, was designed to streamline the resolution of corporate insolvencies in India. However, a recent report by ICRA has revealed a disturbing trend: frequent breaches of timelines under the IBC are leading to a surge in corporate liquidations.
ICRA’s findings paint a concerning picture. The IBC mandates that Corporate Insolvency Resolution Processes (CIRPs) be completed within stipulated timelines, with the intention of value maximisation. However, in over 71% of cases, the 270-day timeline is being exceeded. This significant deviation from the intended schedule is having a detrimental impact on the effectiveness of the IBC.
- Timeline Breaches:
- ICRA reports that a significant percentage of Corporate Insolvency Resolution Processes (CIRPs) exceed the stipulated timelines.
- Specifically, over 71% of cases are going beyond the 270-day timeline.
- Impact on Liquidations:
- These frequent timeline breaches are directly contributing to an increased number of liquidation orders.
- The elongated process leads to the erosion of the corporate debtor’s value, making liquidation a more likely outcome.
- Key Factors:
- Delays can arise from various factors, including litigation from promoters or dissenting creditors, and overburdened National Company Law Tribunal (NCLT) benches.
- Financial Implications:
- Delays are a major factor in the high percentage of “haircuts” that lenders are forced to take.
- The longer the process, the less money the lenders recover.
- ICRA’s Observations:
- ICRA has observed that the higher the number of days taken for the resolution, the lower has been the recovery.
- ICRA believes creditors are approaching the NCLT to admit a defaulting corporate debtor with substantial delays, which has resulted in significant erosion of assets.
In essence, ICRA’s analysis highlights a critical issue: the failure to adhere to IBC timelines is undermining the effectiveness of the code, leading to more liquidations and greater financial losses for creditors.
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