63 Businesses Resolve Debt in September Quarter; Recovery from Risky Deals Rises

Since the inception of the Insolvency and Bankruptcy Code (IBC) 8 years ago, India has witnessed significant progress in resolving corporate debt and revitalising distressed businesses. In the September 2024 quarter, 63 companies successfully avoided liquidation through resolution plans, contributing to a total of 121 firms saved from insolvency this financial year. 

This post examines the recent rise in debt resolutions and explores the success of the IBC framework.

IBC’s Role in Debt Resolution

The Insolvency and Bankruptcy Code (IBC) was implemented to create a streamlined, effective process for handling corporate debt and preventing viable companies from liquidation. Over the past 8 years, a total of 1,068 businesses have been saved from insolvency, reflecting the growing strength and impact of this legislation. 

In FY24, the IBC witnessed a record 269 resolution plans approved by the National Company Law Tribunal (NCLT), up from 189 in the previous year, underscoring the increasing trust and efficacy in the IBC process.

In the September quarter alone, nearly half of the total companies saved this year found relief, highlighting a productive quarter for debt resolutions under the IBC. 

Rising Trend in Resolutions Initiated by Lenders

A noticeable shift has occurred in the parties initiating bankruptcy proceedings. Traditionally, operational creditors, such as vendors and service providers, were the primary initiators of IBC action. 

However, recent data shows that a larger portion of cases is now being initiated by financial creditors, such as banks and financial institutions. This change is viewed positively by policymakers, as the IBC was designed for substantial debt restructuring rather than as a collection mechanism for small operational debts. 

Challenges from Risky Deals and Avoidance Transactions

A significant challenge that often accompanies distressed companies is the prevalence of risky transactions made by promoters prior to bankruptcy. Such transactions, known as “avoidance transactions,” often divert valuable assets, leaving creditors at a disadvantage. 

To combat this, IBC-appointed professionals have referred over 1,326 transactions valued at more than ₹3.76 trillion to tribunals for review. These tribunals have already ordered the recovery of ₹7,516 crore from avoidance transactions, a 12% increase from ₹6,676 crore in the previous quarter Q1 FY24.

This recovery from dubious deals is a crucial element in protecting creditor interests and reducing the financial losses, or “haircuts,” that lenders face during debt restructuring.The recovery from such transactions not only aids in restoring creditor funds but also discourages financially irresponsible behaviour by company promoters.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.