Out of the 383 admitted Personal Insolvency Resolution Plans (PIRPs), creditors have realised Rs 102.78 crore, which is just 2.16 per cent of their admitted claims, according to the quarterly newsletter of the Insolvency and Bankruptcy Board of India (IBBI).
Among these 383 admitted PIRPs, 124 have been closed. Among these closures, 12 were withdrawals, 86 were due to non-submission or rejection of the repayment plan, and 26 resulted in the approval of a repayment plan. During the quarter from January to March 2024, five PIRPs saw the approval of repayment plans.
Legislation and Filing of Applications
Provisions related to insolvency resolution and bankruptcy for personal guarantors (PGs) to corporate debtors (CDs) were enacted on 1 December 2019. As of 31 March 2024, a total of 2,800 applications have been filed to initiate the personal insolvency resolution process (PIRP) for PGs to CDs. Out of these, 401 applications were submitted by debtors, and 2,399 were filed by creditors under sections 94 and 95 of the Code, respectively.
Among these applications, 50 were filed before various benches of the Debt Recovery Tribunal (DRT), and 2,750 were filed before different benches of the National Company Law Tribunal (NCLT).
Increase in Resolution Plan Approvals
"A record number of 269 resolution plans were approved by NCLT during the financial year 2023-24, a 42 per cent increase from the previous year, indicating the effectiveness of the Insolvency and Bankruptcy Code (IBC) in facilitating the revival of insolvent businesses," said Sanjeev Kumar Sharma, Senior Partner at Saraf and Partners.
As of 31 March 2024, creditors have recovered Rs 3.36 lakh crore through various resolution plans. They have achieved 161.76 per cent of the liquidation value and 84.98 per cent of the fair value of Corporate Debtors, based on 850 cases where fair value has been estimated.
Creditors' Recovery Analysis
"The haircut for creditors relative to the fair value of assets was around 15 per cent, while relative to their admitted claims it is around 68 per cent, indicating that creditors are deriving good value for their debts," said Durgesh Khanapurkar, Partner at Desai & Diwanji.
On average, Financial Creditors (FCs) have recovered 32 per cent of their claims, while Operational Creditors have recovered about 25 per cent. Operational Creditors have taken the lead with 3,667 cases filed, compared to 3,440 cases filed by Financial Creditors.
Challenges in Personal Insolvency Recovery
"A notable number of cases initiated by Operational Creditors (756) were settled and withdrawn under Section 12A, compared to 306 cases by Financial Creditors. This shows that Operational Creditors are utilising the provisions of the Code for recovering their dues," said Mukesh Chand, Senior Counsel at Economic Laws Practice (ELP).
Chand further noted that the primary reason for poor recovery in personal insolvency is the lack of information about the assets of the guarantors. Many assets are protected and beyond the reach of creditors. "Section 96 of the Code provides for an interim moratorium, allowing guarantors to stall recovery actions by merely filing an application. This loophole is being exploited," he pointed out.
Avoidance Transactions And Recovery
A total of Rs 3,70,942 crore is involved in 1,237 cases related to avoidance transactions. However, only 293 cases have been resolved, resulting in a meager recovery of Rs 6,599 crore.
"Notably, Rs 5,500 crore of the recovered amount pertains to a single case involving Jaypee Infra, where a mortgage of land in favor of the Banks was set aside. This indicates that outside of significant cases, recovery is negligible," emphasised Chand.
Recent Amendments And Their Impact
In January 2024, the Insolvency Regulations for Personal Guarantors were amended to streamline the process. The most significant change from this amendment was allowing Resolution Professionals to also act as the Bankruptcy Trustee.
Jayesh H, Co-founder of Juris Corp Advocates and Solicitors, said, "The data is interesting, especially for what it does not cover!" Jayesh mentioned that in the initial years, due to the way the Board for Industrial and Financial Reconstruction (BIFR) functioned, resolution was low as many cases were essentially beyond revival.
"In the old regime of insolvency laws (Provincial Insolvency Act and Presidential Towns Insolvency Act), recovery proceedings were plagued by the presence of undisclosed assets, assets shielded in trusts, pre-securitised, or ring-fenced assets. This may also affect recoveries under the IBC. However, as financial regulation and transparency improve, we may see higher recoveries from individual debtors, including personal guarantors," said Khanapurkar from Desai & Diwanji.
Khanapurkar also noted that the pendency of proceedings before the Supreme Court challenging the validity of the Code, as it applies to personal guarantors, had stalled progress until November 2023, when the Supreme Court upheld the validity of these provisions.
Lack of Comparative Data
Highlighting the quarterly data, Jayesh mentioned the lack of comparative data on the amount realised (in percentage terms against claim value) over the years. "Does one conclude that the amount being realized has fallen over the years, hence the reluctance to share it? Also, there is no comparative data on the time taken to close a CIRP over the years, while last year’s data is given. This again raises questions about whether the NCLT’s disposal rate has slowed and if they are taking longer to conclude a CIRP," added Jayesh.
Areas For Improvement
Experts agreed that the IBC, 2016 has been widely recognized for bringing significant improvements to the insolvency framework in India. However, several areas urgently require attention to enhance its effectiveness. It is crucial to address delays and improve transparency of asset information to ensure better recovery rates and overall success of insolvency processes under the Code.
