Insolvency Rule Adjustments May Not Significantly Boost Recovery Rates for Asset Reconstruction Companies and Lenders

Insolvency Amendments Unlikely to Boost Recovery Rates, but May Improve Predictability

The recent amendments to the Insolvency and Bankruptcy Code (IBC) are unlikely to result in improved recovery rates for lenders, asset reconstruction companies, and security receipt investors. However, these changes may help improve recovery predictions, according to analysts.

The amendments, passed by Parliament on April 1, aim to facilitate faster resolution of stressed firms and reduce the case backlog. One of the key provisions mandates admission within 14 days for proven default cases, which can significantly reduce the overall resolution timeline by 1-1.5 years.

Current Recovery Rates and Timeline

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The average time taken for admission for the top 25 resolutions in FY25 was around 500 days, according to a report by Crisil Ratings. The Insolvency and Bankruptcy Code resolution process currently takes 3.5-4 years on average, inclusive of over a year spent just in admitting the case into the Corporate Insolvency Resolution Process (CIRP).

As per India Ratings and Research, CIRP recoveries fell to 20 per cent in Q3FY26 from 25 per cent as of Q2FY26, with timelines stretched to nearly 745 days despite system-wide data showing an improvement.

New Framework and Provisions

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The amendments introduce a new creditor-initiated insolvency framework, featuring out-of-court initiation, debtor-in-possession and creditor-in-control model. This framework allows borrowers to retain management control, minimising operational disruption. Additionally, an enabling framework for group insolvency and cross-border insolvency has been introduced to promote investor confidence and align domestic practices with best international practices.

The new framework also includes provisions for out-of-court settlements, where a resolution professional would be appointed for all operational and strategic decision-making while having veto rights over specific resolutions. Finance Minister Nirmala Sitharaman emphasized that the intent is not to liquidate companies but to help them run with guardrails.

Implementation and Impact

Crisil, in its report, said that the introduction of the creditor-initiated insolvency resolution process (CIIRP) will bring much-needed relief by allowing out-of-court settlements. With NCLT's heavy backlog of 7,000 cases pending admission, the new framework is expected to provide relief to borrowers and investors alike.