Manufacturing tops insolvency cases, real estate a close second

In the second quarter of fiscal year 2024 (Q2 FY24), 38 per cent of the 7,058 companies admitted under the Corporate Insolvency Resolution Process (CIRPs) belong to the manufacturing sector, followed by the real estate and construction sectors, according to a report by CareEdge.

The second quarter saw a 19 per cent year-on-year increase in the number of insolvency cases, while the timeline for resolutions continued to rise, said the report.   

CareEdge

The report shows that the share of the various sectors has largely remained constant compared with the year-ago period.

The manufacturing sector accounts for the highest share at 38 per cent of the overall cases, followed by  real estate (21 per cent), construction (11 per cent) and trade (wholesale & retail) sectors (10 per cent).

In a recent judgement, the Supreme Court upheld the constitutionality of IBC provisions on Personal Guarantors’ Insolvency Resolution, dismissing over 200 petitions which had challenged the legal validity of such provisions. 

This ruling implies that the personal assets of guarantors can now be utilised to settle outstanding debts owed to creditors 

"The recovery rate from personal guarantors currently stands at 5.22%. This rate is anticipated to rise following the Supreme Court’s recent ruling affirming the constitutionality of the IBC provisions regarding Personal Guarantors’ Insolvency Resolution," said CareEdge in a note.

The report noted that of the 2,289 applications of insolvency resolution of personal guarantors:   

 

1. 88 were withdrawn, rejected or dismissed before the appointment of a resolution professional. 
2. Resolution professionals were appointed in 991 cases, while 282 cases have been admitted.
3. Out of these cases, 90 have been closed, 7 have withdrawn, 62 have been closed due to non-submission/rejection of plans. 
4. Only 21 have yielded approval of repayment plans and have realised Rs 91.27 crore which is 5.22 per cent of their approved claims. 
5. 62 cases have been withdrawn/rejected/dismissed. 

CareEdge

 

Corporate insolvency cases remain below the pre-pandemic level

 

The Corporate Insolvency Resolution Process (CIRPs) has risen nearly 19 per cent year-over-year in Q2 FY24, however, the number of cases admitted to the insolvency process is still lower compared to pre-pandemic quarters in FY20, said the report by the rating agency. 

CareEdge

“The CIRP initiation scaled up rapidly till FY20 and dropped off in FY21 due to the pandemic. In FY22 and FY23, CIRP initiation commenced rising again. In FY23, the number of cases crossed the FY19 threshold, and the growth has continued in Q2FY24,” said CareEdge. 

The CareEdge report noted that the Insolvency and Bankruptcy Code (IBC) has continued to gain popularity, with over 7,000 companies being admitted and a significant number of these cases on a cumulative basis being filed by the financial creditors (3,141 cases) and the operational creditors (3,491 cases). 

CareEdge

 

“The share of CIRPs initiated by corporate debtors has reduced significantly over time and is now initiated primarily in cases where the defaults are quite high,” said the report. 

The status of the cases largely remains constant  

The status of the Insolvency cases has largely remained constant compared with the previous quarter. Of the total 7,058 cases admitted into CIRP at the end of September 2023:

1. Only 11 per cent have ended in approval of resolution plans. 
2. In the second quarter 28.4 per cent remain in the resolution process compared to 31.3 per cent as of the end of the first quarter.
3. Notably, 2,249 cases have ended in liquidation (31.9 per cent of the total cases admitted). Meanwhile, 77 per cent of such cases were either Board for Industrial and Financial Reconstruction (BIFR) cases or defunct. 
4. Around 14.9 per cent (1,053 CIRPs) have been closed on appeal /review /settled, while 13.4 per cent have been withdrawn under Section 12A. 
5. A significant number of withdrawn cases (around 54 per cent) were less than Rs 1 crore. 
6. The primary reason for withdrawal has been either the full settlement with the applicant/creditors (405 cases) or other settlement with creditors (267 cases).

CareEdge

Corporate resolutions timelines continue to rise across the board

According to the report, of the over 2,000 ongoing CIRPs, there has been a delay of more than 270 days for the completion of the process of 67 per cent of ongoing cases in September 2023 as compared to 73 per cent in September 2021 and 63 per cent in September 2022. 
 

The share has broadly moved to the higher number of days tier, as per the ratings agency.  The case with ‘more than 180 days but less than 270 days’ delay is the second largest highlighting the significant delays in the process. Further, the other two categories have a similar share in the current quarter compared to the last quarter indicating that a similar number of cases have commenced in both quarters.

Further, the pendency persists even for cases which have gone into liquidation with nearly 55 per cent of the cases pending for more than two years and another 20 per cent of the cases pending for more than one year. 

CareEdge

Notably, post the implementation of the IBC 2016, the overall recovery rate till Q4FY22 in India reached 32.9 per cent. The recovery rate for Q2FY24 stood at 33.01 per cent, while the overall recovery rate reached 31.85 per cent till Q2FY24, said CareEdge. 

CareEdge

“For the cases which have been resolved, the creditors have continued to face a haircut of approximately 68 per cent on admitted claims. Some of the cases being disposed of are several years old. Thus, there is a huge amount of interest and overdue charges admitted to such cases, inflating the overall figures,” said the rating agency.