Economic Survey 2025: IBC Nudging Companies To Resolve Their Distress Early

2025-01-31 06:19:11

(MENAFN- Live Mint) 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insolvency resolution processes (CIRPs) of corporate debtors (CDs) having underlying defaults of ₹10.2 trillion were withdrawn before their admission, reflecting a significant shift in debtor behaviour driven by the deterrent effect of the IBC, the survey, tabled in parliament on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.

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