IBC has changed debtor-creditor dynamics

Fear of losing their companies forever has become a major deterrent for unscrupulous elements, changing the debtor-creditor relationship as debtors have chosen to settle many cases even before the admission of cases in the National Company Law Tribunal (NCLT), the Economic Survey said in its second volume.

“There have been many instances where debtors have been settling their debts on their own or settling immediately on the filing of an application with the NCLT before it is admitted. It is pertinent to note that since the enactment of the Code in 2016, of the 18,892 applications that were dealt with, as many as 14,884 cases involving defaults of `5.15 lakh crore were withdrawn by September 2020 from various benches of the NCLT, before these applications were admitted by the adjudicating authority and 897 processes were closed mid-way by December 2020,” the Survey said.

The Insolvency and Bankruptcy Code has hence brought about significant behavioural changes among the creditors and debtors thereby redefining debtor-creditor relationship.

“The inevitable consequence of a resolution process (the control and management of the firm move away from existing promoters and managers, most probably, forever) deters the management and promoter of the firm from operating below the optimum level of efficiency. Further, it encourages the debtors to settle default expeditiously with the creditor at the earliest, preferably outside the code,” the Survey said.

The Survey numbers show that almost 83% of the cases are getting resolved on the way, before the official commencement of insolvency resolution plan under the Code on account of behavioural change among the defaulting debtors.

“Only 7% of the corporate debtors (CDs) have undergone the entire process yielding either resolution or liquidation. Remaining 10% of CDs are still undergoing the process,” the Survey said.

However, the Survey acknowledged that the time taken to complete a resolution has to be sped up. The 308 cases, which have yielded resolution by the end of December 2020, took an average of 441 days for the conclusion, more than 100 days from the 330 day outer limit specified by the Code.