Number of cases ending in liquidation increase, recovery rate falls

The cumulative recovery rate has been on a downtrend, decreasing from 43 percent in Q1FY20 and 32.9 percent in Q4FY22, according to an analysis of the latest numbers of insolvency board IBBI carried out by Care Ratings.(Representative image)

A significant number of cases ended up in liquidation in India’s insolvency courts and even in cases where a resolution took place, the effective recovery rate of lenders fell drastically in the last quarter of 2022, according to the Insolvency and Bankruptcy Board of India (IBBI).

To put things in perspective, about 73 corporate insolvency resolution processes ended up in liquidation during the October-December quarter, according to the IBBI data.

With this, the total number of insolvency cases that ended in liquidation stood at 1,901, which exclude cases where liquidation orders were set aside by National Company Law Tribunal (NCLAT) and cases resolved after liquidation orders, showed the data.

According to a report by credit rating agency CareEdge, the overall recovery rate has fallen in past few years. The overall recovery rate until Q3FY23 was 30.4 percent, implying a sacrifice of approximately 70 percent on the part of creditors.

The cumulative recovery rate has been on a downtrend, decreasing from 43 percent in Q1FY20 and 32.9 percent in Q4FY22.

Also read:  Reliance Capital Resolution: NCLAT concludes hearing, reserves order over lenders plea

Of the total 1,901 cases, final reports have been submitted in 453 cases while 1,448 cases are going through the liquidation process, data showed.
The Insolvency and Bankruptcy Code (IBC), 2016, was introduced with the aim of putting in place a time-bound mechanism for resolution of insolvency and bankruptcy cases in India.

It consolidated fragmented laws relating to reorganization, insolvency resolution and liquidation of corporate entities and individuals. The provisions relating to the Corporate Insolvency Resolution Process (CIRP) came into force on December 1, 2016.

While the introduction of IBC was seen as a major banking sector reform, low recovery levels from IBC cases have emerged as a key concern.

New cases jump

The report added that ongoing cases under CIRP have surged as of December 2022, even after the increase in closed cases.

Also read: Bankruptcy cases rise 25% in Q3; recovery lowest at 23.45%: Care Ratings

As of December 2022, ongoing cases increased to 2,000, from 1,896 in September, data showed. The total number of cases admitted in the IBC increased to 6,199 CIRPs by the end of December 2022.

Of the total cases, 4199 have been closed. Among these, corporate debtors (CD) were rescued in 2,298 cases, the data showed.

If one looks at the total number of cases, operational creditors (OCs) triggered 50.57 percent of the CIRPs, followed by about 43.45 percent by financial creditors (FCs) and remaining by corporate debtors, data showed.

As per the IBBI report, it is observed that about 80% of CIRPs having an underlying default of less than Rs 1 crore were initiated on applications by OCs while about 80 percent of CIRPs having an underlying default of more than Rs 10 crore were initiated on applications by FCs.

The share of CIRPs initiated by CDs has been declining over time.

Experts expect that the recoveries through the IBC mechanism are likely to remain low in the coming quarters because of delayed resolution processes and lower recovery values.

“The recoveries will remain low for some time as of now. It might remain at the same levels or may be lower levels in coming quarters,” said Sanjay Agarwal, Senior Director at CareEdge.

The distribution of cases across sectors continues to remain broadly similar, compared to earlier periods, given the extended resolution timelines, CareEdge said.