Promoters are clearing their dues faster under the threat of insolvency

Just the threat of legal action has been pushing many promoters to pay their dues, according to government data.

Many companies' managements have reportedly paid back their dues shortly after lenders filed cases with the National Company Law Tribunal (NCLT), out of fear of losing control over their companies.

Creditors, banks and suppliers have recovered dues pretty much immediately after filing under the Insolvency & Bankruptcy Code (IBC), without even waiting for petitions to be admitted.


According to data from the Insolvency & Bankruptcy Board of India (IBBI), NCLT benches have closed 6,811 cases after admission, while 25,565 cases were closed before they were ever admitted to the bench; a 3.7x difference.

Once a petition is admitted to the NCLT, the tribunal appoints a resolution professional and a committee of creditors, leading to the ouster of promoters.




Since 2016 - when the law first came into force - settlements of over Rs 8.2 lakh crore have been paid out, as of May 2023.

The government has seen claims of Rs 9.2 lakh crore, of which Rs 2.9 lakh crore has been recovered from 720 cases.

Even after admission, around 1,900 cases saw a closure because of withdrawal, through appeals and reviews, or settlement.

"A distressed asset has a life cycle. Its value gradually declines with time if distress is not addressed. The credible threat of the code, that a corporate debtor may change hands, has changed the behaviour of debtors. Thousands of debtors are resolving distress in the early stages," the IBBI said, according to a TOI report.

"They are resolving when default is imminent, on receipt of notice of repayment but before filing an application, after filing application but before its admission, and even after the admission of application, making best efforts to avoid consequences of the resolution process. Most companies are rescued at these stages," the board added.

There are also other factors at play in these rapid settlements, with a number of settlements coming after cases were filed by operational creditors, whose dues are smaller than those owed to big banks. Promoters often clear these dues - some of which may have been pending for years - due to their size.

Around 80% of corporate insolvency resolution cases - with a default of under Rs 1 crore - were triggered by the operational creditors.

In cases where the defaults were over Rs 10 crore, 80% of cases were intiated by financial creditors - banks, financial institutions and homebuyers in case of real estate.

Among 6,811 cases admitted by NCLT up to June 2023, operational creditors triggered 49.5% or 3,369 cases, 44.6% was by financial creditors, with the rest coming from the corporate debtor or the company.

With inputs from TOI