IBC: Moderate recovery rates and tight schedules spoil the fun in fiscal 2024, says Crisil Ratings

The Insolvency and Bankruptcy Code (IBC) recorded its highest ever number of resolutions in fiscal 2024 with 2,691 cases getting approval from the National Company Law Tribunal (NCLT) for resolution plans, up 42 per cent from 189 cases in fiscal 2023, even as moderate recovery rates and tight timelines played a dampener, as per Crisil Ratings data.

Of the 269 cases, 88 percent concern backlogged admissions from previous years.

The agency in the study noted that this was due to greater investor interest in reversing the distressed assets as seen in the resolution plan applications. The appointment of new NCLT members also helped in more resolution cases.

Given the likelihood of sustained demand across most sectors, the number of acceptable restructuring plans received by lenders under NCLT has increased, according to the agency’s assessment. Real estate and manufacturing contributed 65 per cent of the total approved plans for fiscal 2024.

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This year, restructuring plans were implemented with a recovery rate of 27 per cent of accepted claims, lower than the 36 per cent realised in fiscal 2023. The recovery timelines have increased to 850 days as compared to 825 days in the previous fiscal, Crisil Ratings said.

The agency opined that one of the hurdles in maximising recoveries and reducing the timelines for resolution of disputes is the burden of pending cases in the NCLT — 4,400 cases as of March 2024. Lack of a common mediation platform for promoters and lenders to discuss and find solutions for faster resolution of disputes was another hurdle.

To reduce the time it takes to resolve disputes, the Bankruptcy and Insolvency Board of India (IBBI) is considering introducing formal out-of-court solutions such as insolvency mediation, as recommended by an expert committee constituted by IBBI in January 2024.

Crisil Ratings said the process will include pre- and post-admission mediation to find consensus among the parties on a settlement, thereby preserving the business value of the ailing company through faster resolutions.

Resolutions in the real estate and manufacturing sectors increased by 200 percent and 22 percent, respectively, in fiscal year 2024 compared to fiscal year 2023.

“In the real estate sector, healthy growth in residential demand in fiscal 2024 and expectations of healthy growth in the next two fiscal years have fuelled interest among solution applicants. In the manufacturing sector, solutions for mid-sized and small businesses have been in the spotlight as many larger companies have already been dissolved,” the agency said.

Mohit Makhija, Senior Director, CRISIL Ratings, noted that the higher case resolution rate is a result of continuous efforts to improve the case resolution throughput rate of IBCs through structural reforms, the most important of which was the appointment of 15 additional NCLT members in the second half of fiscal 2023.

“Progress on other initiatives announced in the recent budget, such as the implementation of a unified IT platform for data storage and dissemination through common dashboards for all stakeholders, will help strengthen the data management structures necessary to enhance the ability to achieve higher resolution in the medium term,” Makhija said.

At the same time, delays in the admission of cases by the NCLT due to the weight of pending cases, along with numerous cross-litigations among the concerned parties, objections filed by promoters and adjourned hearing of cases are prolonging the time taken to dispose of cases, according to the study.

Sarode, Director, CRISIL Ratings, “Delay in resolution not only erodes the value of the asset but also reduces the chances of its revival. Resolutions over the last three fiscal years suggest that a one-year delay in resolution reduces the recovery rate by 800-1000 basis points.”

Therefore, initiatives like mediation in insolvency cases and increasing the number of NCLT judges are steps in the right direction to reduce the time taken to resolve disputes and thereby increase recovery rates for lenders, Sarode added.

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