NEW DELHI : Operating creditors and sellers alike have filed the majority of bankruptcy cases with defaults of less than £1 crore, while financial institutions dragged companies for defaults of up to as many as up to tribunals £10 crore according to official information.
The Bankruptcy and Bankruptcy Office of India (IBBI) said in its most recent quarterly bulletin that about 80% of bankruptcy proceedings have a failure of less than £1 crore was initiated by operating creditors, while 80% of cases resulted in defaults of over £10 crore were initiated at the request of financial creditors.
Bankruptcy cases filed by operational creditors accounted for more than half of the 4,376 cases initiated under the Bankruptcy and Bankruptcy Act by March 31, 2021, while around 43% of the cases were triggered by financial creditors. The remaining cases were filed by the companies that were on the verge of financial collapse.
The dominance of insolvency cases by operational creditors, especially minor defaults, reflects how suppliers struggle with late payments from corporate customers – a trend that only intensified during the second wave of coronavirus infections. Several small businesses said their payment cycle lengthened during the second wave of the pandemic.
Around three quarters of all insolvency proceedings initiated by operational creditors led to the liquidation of the corporate debtor and were concluded. In the case of proceedings triggered by financial creditors that were closed, nearly half of the companies were wound up. According to IBBI, 79% of all ongoing insolvency proceedings have violated the statutory 270-day period for finding a solution. This is due to litigation involving shareholders and potential investors.
Prolonged litigation derails the business of the corporate debtor, idling assets and depreciating in value, resulting in job losses. To remedy this, the central government recently launched a new resolution scheme called “Pre-Pack” which is a mix of formal and informal out-of-court restructuring. However, the system is only limited to cases where default settings of up to £10 lakh. If successful, the pre-pack program will likely prompt the government to consider increasing the threshold to cover larger outages.
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