IBC and the “Haircut” Debate – Recovery, Resolution and Creditor Rights

IBC and the “Haircut” Debate Latest News

• A recent National Company Law Tribunal (NCLT) order concerning Zee Group founder Subhash Chandra has revived concerns over deep haircuts under the Insolvency and Bankruptcy Code (IBC), 2016, as well as the integrity of the creditor-voting process.
• The NCLT approved a repayment plan offering only ₹6.25 crore against admitted claims of about ₹22,006.57 crore, apart from ₹25 lakh towards process costs. 
• The case has raised questions about asset valuation, admission of claims, related-party creditors, voting rights and the balance between resolution and recovery.

IBC – How Does the Resolution Process Work?

• The IBC, 2016 created a time-bound framework for dealing with financially distressed companies through either resolution or liquidation.
• Broad process:
  • A financial/defaulting creditor approaches the NCLT for initiation of insolvency proceedings.
  • A Resolution Professional (RP) takes charge of the process.
  • At least two registered valuers assess the debtor’s assets.
• They determine –
  • Fair value: Estimated value of assets under their present condition.
  • Liquidation value: Expected realisation if assets are sold, generally through liquidation.
  • Enterprise value: Economic worth of the business as a going concern.
• Prospective resolution applicants submit plans. The Committee of Creditors (CoC) evaluates and votes on the plan. A plan approved by the requisite majority is submitted to the NCLT for final approval.
• Thus, IBC seeks to preserve the value of a viable enterprise rather than merely maximise immediate recovery.

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The “Haircut” Problem

• Haircut is not defined in the IBC. In banking terminology, it broadly denotes the reduction in the value recognised against a lender’s claim or collateral.
• MCA data show that during FY2021-22 to FY2025-26, 1,077 cases were resolved under IBC, with creditors recovering around ₹2.47 lakh crore—an average recovery of roughly 29% of admitted claims.
• The 20% recovery in FY26, the lowest in the five-year period, has intensified the debate over whether IBC is adequately protecting creditors.

Resolution vs Recovery – Government’s Position

• The government maintains that “resolution, not recovery” is the primary objective of the IBC.
• A creditor’s admitted claim may include accumulated interest on NPAs; loans that have already substantially lost economic value; guarantees relating to such loans; and liabilities that do not correspond to currently recoverable assets.
• Therefore, comparing realisation mechanically with the total admitted claim may exaggerate the apparent haircut.
• The government also argues that IBC has improved credit discipline and contributed to the decline in banks’ Gross NPAs, while post-resolution equity value may not be captured fully in conventional recovery calculations.

Banks’ Concerns – Valuation and Transparency 

• Banks have nevertheless highlighted concerns about excessive haircuts, particularly deficiencies in asset valuation.
• Key concerns:
  • Inadequate identification of assets.
  • Lack of uniform valuation methodologies.
  • Excessive reliance on liquidation value rather than enterprise/going-concern value.
  • Divergence between valuation reports.
  • Insufficient transparency in the conduct of valuers and auditors.
• SBI has argued for systems capable of better reflecting enterprise value, while Bank of Baroda emphasised that accurate and timely valuation is crucial for both creditor recovery and successful revival.
• Indian Overseas Bank has pointed to the absence of uniform sector-specific valuation standards, which can produce substantially different estimates of the same company’s worth.

IBC Still Performs Better Than Other Recovery Mechanisms

• Despite low recoveries, IBC has generally outperformed conventional debt-recovery mechanisms.
• In FY2024, recovery rates were 2% in Lok Adalats, 9.9% in Debt Recovery Tribunals (DRTs), 27.8% in SARFAESI, and 39% in IBC.
• In FY2024, it was 1.8% in Lok Adalats, 15.2% in DRTs, 24.7% in SARFAESI, and 28.3% in IBC.
• This distinction is important: IBC is primarily a resolution mechanism, whereas DRTs, Lok Adalats and SARFAESI are predominantly oriented towards enforcement and recovery.

Subhash Chandra Case – Why Is It Controversial?

• The controversy goes beyond the size of the haircut. Of 23 creditors participating in voting, the repayment plan received 80.814% of the votes, while banks opposing it collectively held only 19.186%.
• Banks alleged that at least five entities supporting the plan were associate/related parties of Chandra and therefore their votes should not have been counted.
• Chandra’s office rejected the allegation, arguing that certain entities were connected to Jawahar Goel and that their business interests had been separated from Chandra’s through a family business restructuring in 2008-09.

NCLT’s Serious Findings on Claim Verification

• The NCLT identified significant deficiencies in the admission of claims.
• 1,260 questionable individual claims:
  • Claims filed through Anil Kumar and Sunil Jain, representing 960 and 300 individuals respectively, were admitted despite apparently inadequate documentary evidence. 
  • The tribunal criticised the RP for admitting such claims without adequate due diligence and verification.
• Alleged related-party claims:
  • The tribunal also questioned claims associated with several entities, particularly where relationships with the personal guarantor appeared significant.
  • The NCLT also flagged allegations that some guarantees could have been collusive arrangements designed to create artificial liabilities.

Way Forward

The case highlights the need to strengthen the IBC ecosystem through –

• Transparent and standardised valuation methodologies across sectors.
• Greater emphasis on going-concern/enterprise value where businesses remain viable.
• Stronger scrutiny of related-party and associate-party claims.
• Robust documentary verification before admitting claims.
• Greater accountability of Resolution Professionals and valuers.
• Safeguards against artificial or collusive liabilities.
• Faster resolution to prevent further erosion of stressed assets.
• Better monitoring of creditor voting to preserve the integrity of the CoC process.

Conclusion

• The central issue is not simply whether a particular haircut is “high”. 
• The real question is whether the IBC process maximises the economic value of a distressed enterprise while ensuring fair treatment of creditors and preventing manipulation of claims and voting rights. 
• A credible insolvency regime must therefore balance resolution, value maximisation, recovery, transparency and credit discipline.

Source: IE | IE