IBC-resolved firms

are faring well

Positive effect. An IIM Ahmedabad study reveals marked improvement in sales, employment, assets and market capitalisation in the post-resolution phase

The Insolvency and Bankruptcy Code, 2016 (IBC) has facilitated a consolidation of the legal framework and hastened the resolution process of distressed companies by providing an improved, efficient mechanism. It has provided a path for distressed and defaulting businesses to undergo resolution and continue as going concerns, preserve jobs, protect investments, and maintain operational viability. In this piece, we assess the performance of corporate entities having undergone the resolution process.

Among several studies that have been undertaken to comprehend and understand the effect of the corporate insolvency resolution process (CIRP), it is certainly worthwhile to analyse IIM Ahmedabad’s ‘Report of Study on Effectiveness of the Resolution Process: Firm Outcomes in the post-IBC Period’. Published in August 2023, the report examines the performance and outcomes of the corporate entities both before and after the resolution process. The performance of the resolved entities is also compared to peers by size and industry. This comparison shows how much of a difference there is between the changes brought about by improved management and the changes that have resulted from market forces.

The study largely focused on the aspects of why the IBC is positive in the field of handling businesses and stakeholders. Some of the major findings from the report are:

The average sales of companies have surged by 76 per cent in the three years since the resolution of an entity. The resolved entities have achieved operational break-even in the post-resolution period, which is a notable improvement over the pre-resolution period.

The average employee expenses increased by around 50 per cent in the three years following the resolution, suggesting higher employment intensity in the resolved entities (listed) during the post-resolution phase. Also, in this phase, there has been a noticeable increase in overall employment across all firms.

The trends show that the average total assets of resolved entities after resolution have significantly increased by approximately 50 per cent. This, coupled with 130 per cent increase in capex, indicate a build-up of tangible assets in the balance sheets of these companies’ post-resolution.

The profitability ratios of the resolved entities exhibit convergence with the benchmark averages during the post-resolution phase.

Further, trends in the market capitalisation of listed resolved companies point to a notable recovery in the average market valuations in the post-resolution period. The total market valuation of all resolved firms increased from about ₹2-lakh crore to ₹6-lakh crore in the post-resolution phase, indicating that the market has priced and recognised the potential of the these entities.

Over the post-resolution period, liquidity increased by roughly 80 per cent. The trends point to a notable rise in the liquidity of the resolved companies during the post-resolution phase. In the third year following the resolution, the current assets to current liability ratio improved from 1.01 from having been 1.83 in the year of bankruptcy.

The study analyses the performance of resolved entities in the post-resolution period compared to their performance prior to insolvency and it was found that resolved entities have significantly improved their performance in terms of profitability, liquidity, activity, and turnover ratios. Keeping aside the various business parameters, revival and continuity of these companies, which in turn provide continued or new employment opportunities to workmen and employees, has a huge positive socio-economic impact which cannot be ignored.

Room for improvement

The report highlights that there are certain process difficulties with some government departments which cause delay. It further suggests that inefficiencies in the current process could be addressed by implementing a grievance redress mechanism in conjunction with an integrated platform allowing stakeholders to address concerns in the workflow.

While it is certainly some food for thought, the lawmakers need to ensure that any such step should not create another parallel adjudication system which would ultimately end up having a clash with the likes of IBBI and NCLTs which have now become more stable and are maturing with every passing day. There is certainly room for improvement in every aspect of execution and implementation wherein stakeholder participation can be further enhanced and the ecosystem is further strengthened; the government seems to be taking proactive steps from time to time to do the needful wherever possible. But the churning and brainstorming have to continue given the law is still in its nascent stages.

The National Company Law Tribunals (NCLTs) play a crucial role in facilitating the entire resolution process under IBC by providing a platform for creditors, debtors and other stakeholders to present their concerns and participate in the resolution process. Since the introduction of this law, NCLTs have had to adjudicate and decide upon issues which were a lot more complex than mere admission of cases into insolvency, ranging from the adjudication of claims of creditors, issues in running the CIRP, non-cooperation on the part of the promoters of the corporate debtor, complicated issues around related parties, inter-creditor disputes, approval of resolution plans, third party issues, protection of stakeholders’ interests, and so on.

The “principles of natural justice” is a fundamental aspect of the Indian judicial process and, therefore, NCLTs cannot summarily adjudicate or dismiss applications filed by stakeholders and therefore have to give them a fair opportunity to be heard which obviously consumes time. Therefore, the criticisms around delay need to be assessed along with the above principles for a fair assessment. If the IIM Ahmedabad’s study is taken as a barometer, IBC seems to have delivered to a reasonable extent.

The writer is a practising Advocate in the

Madras High Court

The profitability ratios of the resolved entities exhibit convergence with the benchmark averages during the post-resolution phase.