The insolvency cases fall under different types of proceedings. The insolvency can be a voluntary arrangement, liquidation, administration and receivership. In India, there are two types of insolvency procedures. One is a balance sheet, and the other one is a cash-flow insolvency process. Cash flow insolvency is applicable when the business owner is rich enough to pay back the debt. The business owner does not have the liquid assets in the business to repay the money. The solution to these types of problems goes with the time. The creditor waits till the debtor makes the payment. The debtor also agrees to pay a penalty for the late payment. The balance sheet insolvency arises where the bankruptcy is visible to the general public. The balance sheet shows loss. The liabilities of the company are bigger figures than the assets of the company. Technical insolvency is the other name for balance-sheet insolvency.
In 2016, the central government constituted the National Company Law Tribunal. The regulatory body works as a quasi-judiciary body and interprets insolvency law. The financial creditor, corporate (self) or operational creditor initiates the process of insolvency in a company. The default position because of the financial debt ends with the insolvency process. The petition to NCLT should have the following documents for proof checking: invoice of goods and service supply, statement of accounts, written correspondence between the two parties, consent of the insolvency process, an affidavit stating the notice from the corporate debtor about the dispute, certificate from the banker regarding unpaid operational debt. NCLT handle the insolvency cases and sets new standards for the insolvency process. The blog highlights a recent case with a nuanced approach from NCLT. LOK Housing is a Mumbai-based construction and cement production company. The company is in the process of insolvency. The NCLT granted a 936-day exclusion in the process of resolution. The additional time is for handling the intricacies in the process of resolution. The case reflects the time sensitivity and complexity of the insolvency process.
LOK housing construction case ended up with a nuanced approach that grabbed the attention of the business people. In this case, the NCLT allowed the company to do the resolution process with an additional time of 936 days. The time specification for the completion of the resolution process under the insolvency and bankruptcy code is 270 days. The regulatory authority extends the period only under certain conditions. The June quarter of 2023 shows a record high in the resolution process. The official data shows that the longest period taken for the resolution of stressed assets in 2023 was 643 days. The realisation process is comparatively low in 2021 and 2022. The number of resolutions for financial creditors is 552 in 2023. The number of resolutions for operational creditors is 555 in 2023. The realisation shows a positive trend in operational creditor numbers. The realisation shows a declining trend for the financial creditors. The year 2021 and 2022 has more realisation to the financial creditors. The time flexibility awarded by NCLT to LOK housing shows the diverse challenges in the insolvency process.
What is the recovery rate for insolvency in India?
In the 2019 and 2023 periods, the recovery rate of insolvency has a decline of 32 per cent. It has fallen downward from 43 per cent. According to the CRISIL rating, the fall in the recovery rate led to an expansion in the resolution time. The resolution time had increased from 324 days to 936 days. The credit rating agency CRISIL says that the reason for the delay is due to the delay in the identification of the default and the lack of strength of the judicial bench. The IBC is making amendments to improve the realisation during insolvency. Some of the changes that contribute to the smooth functioning of the recovery process are as follows: approval of asset sale on a segregated basis increased the NCLT bench numbers to 16 and time enhancement for filing the claims. The amendments with sector specification, audit provision for corporate debtors and changes in form G2 also make the insolvency process smooth. The implementation of recent amendments reduces the backlog cases and resolution period.
Difference between financial creditors and operational creditors?
Financial creditors are liable to get back money. They have dealings with the company in terms of money. Operational creditors are liable to get money in return for the goods and services. The nature of the claim differs as the operations and evidence differ in both cases. The priority is given to the financial creditors during the liquidation process. The financial creditors are the committee of creditors. Financial creditors have the right to make decisions and vote for the committee decisions. Operational creditors are part of the committee. The operational creditors do not have the right to vote during the insolvency process. The financial creditors are supposed to show the threshold requirement before the insolvency process starts. Operational creditors are not asked about the threshold limits. The repayment delay from the debtor causes the financial creditor to trigger the insolvency process. Operational creditors do not have the power to trigger the insolvency process. The operational creditors end demand notice and wait for the payment. Financial creditors are part of the committee. Operational creditors have their representatives in the committee if the due crosses a certain threshold.
In the past seven years, IBC has helped 3.16 lakh cores in the insolvency process. IBC had increased the recovery rate to 32 per cent. The other regulatory bodies like the debt recovery tribunal SARFAESI Act and LOK Adalat showed a recovery percentage of 5 to 20. The recovery rate of other regulatory bodies is comparatively low. IBC had improved the credit culture of the corporates. Improving the infrastructure of legal bodies helps for the increasing the recovery rate. The improvement in the credit and legal structure is essential for the growth and functioning of large corporates.