Small debt dominates bulk of bankruptcy settlements

About 80% of the out-of-court settlements once bankruptcy proceedings were initiated were for debt up to ₹10 crore, show data from the Insolvency and Bankruptcy Board of India (IBBI). That’s 845 cases out of a total 1,070 petitions that were withdrawn after being admitted for bankruptcy proceedings between October 2016 and March 2024.

In all, 7,567 cases have been admitted in tribunals under India’s Insolvency and Bankruptcy Code (IBC).

The smallest of defaults were the ones that got settled most. More than half of the petitions withdrawn were for dues up to ₹1 crore. A fourth of all settlements were for debt in the range of ₹1 crore to ₹10 crore, the data show.

For disputes over dues of ₹1,000 crore or higher, only 1% of the cases were settled out of court after admission of bankruptcy proceedings in tribunals. 

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“One reason that there is a higher volume of cases involving smaller amounts being settled is that there is a much higher volume of such cases being initiated as compared to those involving amounts in thousands of crores of rupees," explained Yogendra Aldak, partner at law firm Lakshmikumaran and Sridharan. “Irrespective, it’s much easier for the companies to arrange smaller amounts of money as compared to thousands of crores in short periods of time."

Companies are well aware of the consequences of petitions filed by financial and operational creditors, and to avoid falling into the hands of a committee of creditors, the management tends to pay off smaller creditors, explained Aldak. 

Less burden on tribunals

About 70% of the bankruptcy petitions withdrawn from tribunals were by operational creditors, who are mostly vendors. 

Operational debt could also be claims arising from employment or dues arising under a law. Of the 1,070 petitions withdrawn from bankruptcy tribunals after admission, 756 were by operational creditors and 306 by financial creditors.

Experts said that although the National Company Law Tribunal is not a money-recovery forum, when proceedings under IBC reach settlements, they indirectly end up reducing the burden on the courts.

The number of cases resolved under IBC in 2023-24 was the highest so far under the new bankruptcy regime, at 269, the data show. 

The stigma of insolvency 

As per IBBI data, as of March, more than 28,800 bankruptcy petitions with an underlying default of over ₹10 trillion were withdrawn before admission. These are different from cases settled out of court after being admitted in tribunals.

“As soon as an application for initiation of insolvency resolution process is admitted, the management and promoter lose control over the defaulting company and the management is vest in the hands of the resolution professional under the supervision of the committee of creditors," explained Subodh Dandawate, associate director-regulatory services, at Nexdigm, a business and professional services company. 

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“Therefore, out of fear of losing control to a corporate debtor, in many of the cases promoters tend to settle the matter before admission of application and even after admission as the insolvency code provides enabling provision," Dandawate added.

“There is also the fact that promoter of the corporate debtor concerned may face a stigma of insolvency resolution process, and that could be potentially seen as a bottleneck in future business prospects," he said. “This risk of stigma also persuades the corporate debtor to engage with the creditor at early stage of default and resolve the same amicably."