The Insolvency and Bankruptcy Code (IBC) recorded the highest-ever number of resolutions in fiscal 2024. In the year 269 cases received approval from the National Company Law Tribunal (NCLT) for resolution plans. This marks a 42 per cent increase over the 189 cases resolved in fiscal 2023, according to a report by CRISIL.
The report highlighted that approximately 88 per cent of the 269 cases were from the backlogs of previous years. This increase in resolutions has been driven by greater investor interest in turning around stressed assets, as evidenced by the submission of resolution plans. "Appointment of new NCLT members has also aided in the higher number of resolution cases," said the report.
However, the report pointed out that there was a moderation in recovery rates and stretched timelines. The year saw resolution plans with recovery rates of approximately 27 per cent of the admitted claims, lower than roughly 36 per cent realized in fiscal 2023. The resolution timelines also extended to approximately 850 days, compared to around 825 days in the previous fiscal.
"With demand durability likely across most sectors, the number of acceptable resolution plans received by lenders under NCLT has increased. Real estate and manufacturing contributed to around 65 per cent of total plans approved for fiscal 2024," the report stated.
The resolution count in the real estate and manufacturing sectors increased by approximately 200 per cent and 22 per cent, respectively, in fiscal 2024 as compared with the previous fiscal. In the real estate sector, strong demand growth for residential real estate was seen in fiscal 2024 and the expectation of healthy growth over the next two fiscals has sparked interest among resolution applicants.
In manufacturing, the focus has been on resolutions for mid-sized and small companies, as many larger companies have already been resolved. "The higher case resolution momentum is a result of continuous efforts to improve the resolution throughput rate of IBC through structural reforms, the most prominent being the appointment of 15 additional NCLT members in the latter part of fiscal 2023," said Mohit Makhija, Senior Director, CRISIL Ratings.
Despite these improvements, delays in case admissions by NCLT, due to the burden of ongoing cases and multiple cross-litigations between stakeholders, along with objections filed by promoters and deferred case hearings, are extending the resolution timelines.
One of the challenges in maximizing recovery and reducing resolution timelines is the load of ongoing cases at NCLT, with around 4,400 cases as of March 2024. Another hurdle is the lack of a common mediation platform for both promoters and lenders to discuss and find solutions for quicker settlements.
To address these issues and reduce resolution timelines, the Insolvency and Bankruptcy Board of India (IBBI) is considering introducing formal out-of-court solutions such as Insolvency Mediation. This initiative follows the recommendation of an expert committee constituted by IBBI in January 2024. The mediation process would involve pre- and post-admission mediation to seek consensus among stakeholders for settlement, thereby preserving the business value of the stressed company through faster resolutions.
"Delay in resolution not only impairs the asset value but also reduces the chance of its revival. Resolutions over the past three fiscals indicate that a one-year delay in resolution depletes the recovery rate by 800-1,000 basis points," said Sushant Sarode, Director, of CRISIL Ratings. (ANI)
