Insolvency and Bankruptcy Code incentivise default settlement than admission: CARE Ratings

The Insolvency and Bankruptcy Code (IBC) seems to be driving debtors to settle their defaults before cases are admitted, with over 27,500 applications withdrawn, totaling Rs 9.74 lakh crore, according to a report by CARE Ratings. The ratio of resolution to liquidation has improved from 0.21 in FY18 to 0.64 in Q3FY24.

The average time for resolution or liquidation has increased for operational and financial creditors during the December quarter. The recovery rate till Q3FY24 was 31.86%, with a significant decrease from 43% in Q1FY20. Despite a 19% increase in insolvency cases referred in Q2FY24, the number of cases admitted remained lower compared to earlier quarters in FY20.

CARE Ratings noted a decline in the ongoing CIRPs on a y-o-y and sequential basis, indicating faster disposal of cases compared to admission. Manufacturing still has the largest number of cases, although its share has decreased steadily. The report suggests that the insolvency process may be functioning more efficiently with encouraging signs of resolution.