NEW DELHI : Operational creditors such as sellers have so far filed the bulk of bankruptcy cases involving defaults of less than ₹1 crore, while financial institutions have taken companies to court for claims ₹10 crore, according to official data.
The Insolvency and Bankruptcy Board of India (IBBI) said in its latest quarterly bulletin that around 80% of bankruptcy proceedings involving default of ₹1 crore were initiated by operational creditors, while 80% of cases with defaults ₹10 crore was thrown on the demands of financial creditors.
Bankruptcy cases filed by operational creditors accounted for more than half of the 4,376 cases opened under the Insolvency and Bankruptcy Code until March 31, 2021, while around 43% of cases were triggered by bankruptcy. financial creditors. The rest were filed by companies that were on the brink of financial collapse.
The predominance of bankruptcy cases by operational creditors, particularly over small defaults, reflects how vendors grapple with late payments from corporate clients – a trend that was only worsened during the second. wave of coronavirus infections. Several small businesses said their payment cycles were extended during the second wave of the pandemic.
About three quarters of all bankruptcy proceedings initiated by operational creditors have resulted in the liquidation of the debtor company and have been concluded. In the event of a procedure initiated by financial creditors that was concluded, almost half of the companies faced liquidation. IBBI said that in 79% of all pending bankruptcy proceedings, the 270-day time limit specified by law to find a resolution was violated. This is due to a dispute involving shareholders and potential investors.
A protracted litigation derails the failing company’s operations, leaves assets idle and loses value in addition to leading to job losses. To address this, the central government recently launched a new resolution system called a “pre-pack,” which is a hybrid of formal and informal, out-of-court restructuring. However, the system is limited to only those cases involving faults in ₹10 lakh. If successful, the prepackaging system is likely to prompt the government to consider raising the threshold to cover larger defaults as well.
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