Operational creditors file most bankruptcy cases below ₹ 1 cr
NEW DELHI : Operational creditors such as sellers have so far filed most bankruptcy cases involving defaults of less than ₹1 crore, while financial institutions took companies to court for defaults of up to ₹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 a default of less than ₹1 crore were initiated by operational creditors, while 80% of cases with defaults of more than ₹10 crore were initiated on the demands of financial creditors.
Bankruptcy cases filed by operational creditors represented 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 initiated by financial creditors. The remaining cases were filed by companies that were on the brink of financial collapse.
The predominance of bankruptcy cases by operational creditors, especially over smaller defaults, reflects how vendors are grappling with late payments from corporate clients – a trend that was only worsened in 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 resulted in the liquidation of the debtor company and were closed. In the event that proceedings initiated by financial creditors have been concluded, almost half of the companies have faced liquidation. The IBBI said that in 79% of all pending bankruptcy proceedings, the 270-day statutory deadline for finding a resolution was violated. This is due to disputes involving shareholders and potential investors.
A protracted litigation derails the operations of the failing company, leaves assets idle and depreciates in addition to resulting in job losses. To solve this problem, the central government recently implemented a new resolution system called a “pre-pack”, which is a hybrid of formal and informal, out-of-court restructuring. However, the scheme is limited only to cases involving defects of up to ₹10 lakh. If successful, the prepackaging program will likely prompt the government to consider raising the threshold to cover larger defaults as well.
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