Prolonged Timelines, 70% Haircut: IBC Needs Reforms

Chennai : The latest controversy involving Essel Group chairman Subhash Chandra has brought out the discrepancies in the Insolvency and Bankruptcy Code (IBC). The creditors have to take close to 70 per cent haircut on their claims, proceedings prolong for more than double the prescribed timeline and by then most distressed companies lose their value. Saurabh Bhalerao, director, CareEdge Ratings finds that IBC needs reforms, including increased judicial capacity, reduced litigation-related delays, stronger early-warning and pre-insolvency restructuring mechanisms, as well as improved information quality and transparency. .

More than a decade after IBC's introduction, how many companies have gone through this resolution process till now? What is the total admitted claims and how much of it has been recovered yet?

The IBC has been in operation for nearly a decade and the numbers show that it has become an important mechanism for dealing with corporate stress. As of June 30, 2026, 9,166 companies had been admitted to the Corporate Insolvency Resolution Process (CIRP), of which roughly 1,500 cases, or 16.2 per cent, had resulted in successful resolution.

More than 3,000 cases, or about a third, had ended in liquidation. Another 15 per cent of cases were closed through appeal, review, settlement or other means, while another 14.5 per cent were withdrawn under Section 12A. There are roughly 1,800 to 1,900 cases currently ongoing.

In terms of value, total admitted claims cumulatively stood at Rs 14.27 lakh crore as of June 2026. Against this, roughly Rs 4.35 lakh crore had been realised, translating into a cumulative recovery rate of 30.5 per cent of admitted claims, or an average haircut of about 69.5 per cent.

However, the headline recovery number needs to be qualified. The recovery actually represents 166.67 per cent of the liquidation value, underscoring how impaired these assets were at the time of resolution. The actual realisation percentage is also likely to be higher because resolutions involving older cases often include significant accrued interest and other receivables added to admitted claims.

The prescribed timeline for completing a corporate insolvency resolution process is 180 days and is extendable to 330 days, including litigation. But in reality, what is the average resolution and liquidation time?

This is probably one of the biggest gaps between the statutory design of the IBC and what we are actually seeing on the ground. As of June 2026, the average time taken for a resolution case was 757 days, which is roughly double the prescribed timeline. It has also been increasing—from 744 days in March 2026 and 713 days in March 2025.

Cases initiated by financial creditors averaged 765 days, while those initiated by operational creditors averaged 766 days. For liquidation cases, the average timeline was roughly 540 days.

More concerning is the ageing of pending cases. Around 76 per cent of ongoing CIRPs have already crossed 270 days, while only 9 per cent were less than 90 days old. The situation is also challenging on the liquidation side, with nearly 70 per cent of ongoing liquidation cases pending for more than two years.

So, while the stock of ongoing companies has been declining marginally, the cases that remain are increasingly complex, directly affecting credit recovery and asset value.

What are the reasons behind these lengthy resolution processes?

There are several factors, which can broadly be classified into four buckets. First is litigation and procedural delays. Second is valuation disputes and difficulties in achieving consensus among stakeholders.

Third is the challenge of attracting credible resolution applicants, particularly for businesses that have already suffered significant operational deterioration. Fourth is the increasing complexity of large and stressed assets.

There is also an important structural issue. Many companies enter the IBC quite late, after substantial deterioration in their financial and operational positions. That reduces the probability of revival and also reduces the pool of potential applicants.

Sectoral concentration is relevant as well. Manufacturing, real estate and construction account for nearly 70 per cent of cumulative admissions. So, the problem is not simply that the legal process is slow; the residual pool itself has become more difficult to resolve.

One of the biggest criticisms of IBC is the deep haircut that creditors often have to accept. What is the recovery rate and what kind of haircuts are financial creditors usually taking?

Haircuts are genuinely one of the most volatile parts of the story. It is worth separating short-term swings from what is structural. Last year was a difficult year. Recoveries against admitted claims nearly halved, falling to around 23 per cent from 46 per cent the previous year.

The current first quarter provides some relief. Financial creditors recovered around 28.6 per cent of admitted claims, up from 22 per cent in the previous quarter. That still represents a steep 71.4 per cent average haircut.

But the important number is that the 28.6 per cent recovery rate actually worked out to 136.7 per cent of the liquidation value. So, although creditors are taking a huge haircut relative to what they are owed on paper, they are still getting well above what they would have received through straight liquidation.

Cumulatively, since the code came into force in 2016, the recovery rate is around 30.5 per cent of admitted claims, but 166.6 per cent of liquidation value. Resolution-led outcomes consistently deliver somewhere between 1.4 and 1.7 times the liquidation value, compared with straight liquidation, where recovery has remained around 4 per cent of claims.

So, while the headline 69.5 per cent haircut looks alarming, it should not automatically be interpreted as 69.5 per cent of economic value being destroyed.

When financial creditors recover only a fraction of the amount they are owed, who ultimately bears the cost—the banks, depositors, taxpayers or the broader economy?

The impact cascades throughout the system. The first and foremost direct impact is on financial creditors, particularly banks. Banks absorb the loss through provisioning and erosion of capital. If a bank recovers only 30, the 70 per cent shortfall has to be absorbed through provisions and ultimately affects its capital and profitability.

For the banking system as a whole, however, this is not necessarily a crisis. Banks record credit losses through provisions, while IBC recovery becomes an important source of recovery against stressed exposures.

The impact on depositors is indirect. Depositors do not directly bear the loss from an individual corporate insolvency because their claim is against the bank. They can, however, pay indirectly through wider credit spreads and more conservative lending. There can also be an indirect fiscal impact when public sector banks require capital support from the government.

The objective should not be to eliminate haircuts at all costs. It should be to distinguish between an unavoidable loss because the underlying business is no longer viable and an avoidable loss caused by delay.

Are large haircuts inevitable when a company enters insolvency, or could earlier intervention and faster resolution significantly improve recovery rates?

Large haircuts are not inevitable. Speed is the lever. Once a company has deteriorated substantially, however, some haircut becomes unavoidable.

The key issue is when the creditor intervenes. If the company enters the process while the business is still operationally viable, there is a better chance of preserving customers, employees, suppliers and the franchise value of the business.

If it enters the process after becoming effectively defunct, the applicant is often buying assets rather than a functioning business. The ideal credit architecture should therefore involve early recognition of stress and a quick resolution when restructuring fails.

The IBC is most effective when it is used as a value-preservation mechanism, rather than as a mechanism to recover value from a business that has already lost most of its enterprise value.

What are the biggest unintended consequences of the IBC that policymakers did not anticipate? Does the current framework distinguish between a genuinely unviable company and a fundamentally viable company facing temporary financial distress?

One significant unintended consequence is that the insolvency process itself can become a source of value loss if it takes too long. The IBC was designed around time-bound resolution, but the average resolution timeline of 757 days is itself one of the biggest concerns.

Another issue is the sheer scale of value lost before the pre-packaged insolvency resolution process. More than Rs 4 lakh crore has been filed in avoidance transaction applications. The system is also increasingly dealing with very complex and aged cases, making the residual pool progressively harder to resolve.

Information is another important issue. Uncertainty over claims, assets, liabilities and competing stakeholder interests can create disputes and slow decision-making. Recent regulatory changes are aimed at improving information quality, transparency and claim verification.

The current framework also does not fully distinguish between liquidity stress and fundamental insolvency. A company may be fundamentally viable but temporarily short of liquidity, while another may have no sustainable economic model. The challenge is to give viable businesses an opportunity for early restructuring rather than allowing them to enter a lengthy insolvency process after enterprise value has already deteriorated.

What are the most important reforms needed to make insolvency resolution genuinely time-bound and improve creditor recoveries?

I would prioritise five reforms. First is judicial capacity. If 76 per cent of ongoing CIRPs have already crossed 270 days, the system needs greater administrative capacity and faster decision-making.

Second, litigation-related delays must be reduced. Litigation is important for protecting stakeholder rights, but it should not become a mechanism for indefinitely delaying resolution.

Third, early-warning and pre-insolvency restructuring mechanisms need to be strengthened. The earlier financial stress is recognised, the greater the probability that enterprise value can be preserved.

Fourth, information quality and transparency must improve. Better default recognition, claim verification and disclosure can reduce disputes and enable creditors to make decisions more quickly.

Fifth, liquidation needs to become genuinely time-bound. We should not assume that every company needs to be rescued. For fundamentally unviable businesses, rapid asset monetisation can produce better outcomes than prolonged liquidation.

There is also significant opportunity in avoidance transactions. Resolution professionals have filed more than 2,100 applications involving approximately Rs 4.65 lakh crore of transactions, including fraudulent, preferential and undervalued transactions. Recovering value through these proceedings can provide additional revenue for creditors beyond resolution-plan proceeds.

Ultimately, the next phase of the IBC should be measured on three parameters: timeliness, recovery and value preservation. We need to bring down the average resolution timeline from 757 days, improve recoveries beyond the current 30.5 per cent, and ensure that recoveries continue to remain well above liquidation value.

The biggest task is to address ageing cases, reduce litigation and procedural bottlenecks, and ensure that companies enter the insolvency process early enough for their underlying enterprise value to still be preserved.