Applicant Reluctance and Legal Complexities in Distressed Acquisitions Under IBC

[Ayushman and Chaitya are students at NALSAR University of Law and Indian Institute of Corporate Affairs.]

The Insolvency and Bankruptcy Code 2016 (IBC) has fundamentally transformed India's corporate rescue framework, creating new avenues for distressed mergers and acquisitions (M&A). While the code promised to resolve corporate insolvency efficiently, data suggests that resolution applicants are reluctant to acquire distressed companies through the corporate insolvency resolution process (CIRP). This article analyses why investors hesitate to acquire distressed companies through India's IBC framework, evidenced by IBBI data. Key deterrents include due diligence challenges under compressed timelines, risks of undisclosed liabilities despite supposed legal protections, limitations of Section 32A's liability shield, and complications with operational creditor claims. The article proposes practical solutions including specialized due diligence frameworks, contingent consideration structures, and indemnity funds to enhance investor confidence and improve the success rate of distressed acquisitions under the IBC regime.

The Distressed M&A Landscape: A Numbers Perspective

A concerning pattern is revealed by the quantitative data from the Insolvency and Bankruptcy Board of India's (IBBI) quarterly newsletters and annual reports: a significant percentage of CIRPs end in liquidation because no viable resolution plans are submitted. The information presented here provides important insight into the reluctancy of the resolution applicants in pursuing distressed acquisitions.

According to the IBBI Quarterly Newsletter (October-December 2024), out of the 8,175 CIRPs initiated by the end of December 2024, only 1,212 cases were resolved by acquisition of distressed companies as a going concern either in CIRP (1,119) or liquidation (93) which amount to only 14.82% of the total CIRP initiated as on 31 December 2024, while 2,707 ended in liquidation (31.11%) and 1,983 are still ongoing cases (24.25%). This stark contrast indicates a level of substantial hesitancy among potential buyers for companies under CIRP.

The trend becomes more pronounced when examining cases that reached the order stage. Of the 6,192 CIRPs that reached closure (either through resolution, liquidation, settlement, withdrawal, or review), 43.71% resulted in liquidation orders, while only 1,119 cases (18.07%) culminated in successful resolution plans. This demonstrates that even when CIRPs progress through the full process, less than half are able to attract viable resolution applicants. The IBBI Annual Report 2023-24 further confirms this pattern, revealing that “about 39% of the CIRPs (440 out of 1,114 for which data are available), which yielded resolution plans, were earlier with Board for Industrial and Financial Reconstruction (BIFR) and/or defunct” and “around 78% of the CIRPs ending in liquidation (2069 out of 2653 for which data are available) were earlier with BIFR and/or defunct”. This suggests that despite the fresh IBC mechanism, deeply distressed assets continue to struggle in attracting resolution applicants. (emphasis supplied)

Perhaps most revealing is the data on CIRPs ending in liquidation specifically due to the complete absence of resolution plans. Of the 2,707 CIRPs that ended in liquidation, 778 (28.74%) cases were compelled to enter into liquidation, which excludes intentional decision of committee of creditors (COC) to liquidate. Of these 778 cases of compelled liquidations, 683 (87.78%) were specifically because no resolution plans were received at all. This precisely evidences resolution applicants' hesitancy to pursue distressed acquisitions under CIRP, as in these cases, not a single investor was willing to submit a viable proposal. (emphasis supplied)

The IBC framework stipulates that resolution plans should be submitted within 90 days of the insolvency commencement date. Even with a potential extension of another 90 days for practical considerations, any process extending beyond this 180-day timeframe suggests potential reluctance among qualified applicants to submit viable plans. Current IBBI data reveals a trend: of the 1,983 ongoing CIRPs, 1,666 cases (84%) have exceeded the 180-day threshold. Similarly, among ongoing liquidation proceedings, 1,290 out of 1,433 cases (90%) have continued beyond 180 days. This significant delay—exceeding 6 months in most instances—strongly indicates that distressed companies are struggling to attract potential acquirers, further evidencing market hesitancy toward distressed companies/assets under the IBC regime.

Legal Complexities in Due Diligence

A key motivator for this hesitation is the distinctive due diligence complexities that present in distressed acquisitions under the IBC regime. As opposed to regular M&A, distressed acquisitions pose a number of tricky diligence challenges:

Information asymmetry and time constraints

Resolution applicants are confronted with significant information asymmetry in performing due diligence on CIRP companies. The IBBI Discussion Paper on Corporate Insolvency Resolution Process (2023) recognizes that "information memorandums tend to have incomplete information on contingent liabilities, potential claims, and pending litigation". This is compounded by the stringent 330-day timeline for completion of CIRP, which shortens the window for due diligence.

The Supreme Court recognized this challenge in CoC of Essar Steel India Limited v. Satish Kumar Gupta and Others (Essar Steel case), and noted that "the compressed timelines under IBC may not always allow for exhaustive due diligence, creating inherent risks for resolution applicants".

Risk of undisclosed liabilities

Although the 'clean slate' principle present in the IBC under Section 31 exists for protecting successful resolution applicants from past liabilities, practical application has revealed persistent risks. The National Company Law Appellate Tribunal in Ghanashyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited (2021) affirmed that while approved resolution plans are binding on all stakeholders, certain statutory liabilities might persist despite not being recognized in the resolution plan.

This legal uncertainty directly impacts investor confidence. The IBBI's working paper on "Effectiveness of the Insolvency and Bankruptcy Code" (2023) found that "uncertainty regarding post-acquisition liabilities ranks among the top three concerns for potential resolution applicants surveyed".

Section 32A: Intent v/s implementation

Through the 2020 amendment, Section 32A was added, with an intention to safeguard the corporate debtor and its assets against previous offences after a resolution plan is approved. However, its implementation has revealed limitations. In JSW Steel Limited v. Mahender Kumar Khandelwal and Others (2020), despite Section 32A protection, the resolution applicant faced challenges with enforcement agencies continuing investigations related to pre-acquisition offenses.

The IBBI Annual Report 2022-23 notes that while Section 32A has improved investor confidence, ambiguities in its interpretation have led to continued litigation, deterring some potential resolution applicants.

Operational creditor claims

The Supreme Court laid out clearly in the Essar Steel case, regarding the treatment of operational creditors' claims. However, practical concerns still persist in determining the appropriate treatment of such claims in resolution plans. Operational creditors’ disputes form a significant portion of post-approval litigation, as highlighted by practical challenges noted in IBBI publications following the Essar Steel case.

Strategies for Structuring Distressed Acquisitions

Given these challenges, successful distressed acquisitions require strategic structuring to minimize post-acquisition risks.

Enhanced due diligence frameworks

Resolution applicants must develop specialized due diligence frameworks for distressed acquisitions. Best practices across other jurisdictions recommend creating a dedicated diligence checklist specifically addressing contingent liabilities, potential claims, and regulatory compliance issues unique to the sector.

Contingent consideration structures

Successful resolution plans increasingly incorporate contingent consideration mechanisms that adjust the purchase price on the basis of post-acquisition discovery of undisclosed liabilities. This approach helps bridge the gap in valuation created by said information asymmetry. IBBI, in its circular dated 17 March 2025, stated "The Insolvency and Bankruptcy Board of India (IBBI) had amended regulation 36 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP regulations) to mandate the disclosure of carry forward of losses as per the Income Tax Act, 1961, in the Information Memorandum (IM)". This intended to decrease the information asymmetry, which is a major deterrent for potential investors. 

Indemnity fund mechanisms

Another emerging strategy is the creation of indemnity funds or escrows. According to the IBBI Newsletter (October-December 2023), "in 2023, approximately 22% of approved resolution plans, incorporated some kind of provisions for indemnity funds to cover any possible undisclosed liabilities".

Conclusion

With over half of the liquidations occurring because there were no workable resolution plans, the statistics make it abundantly evident that the resolution applicants have been hesitant about undertaking distressed acquisitions through CIRP. Due diligence concerns, ambiguity surrounding liability shields, complex legislative frameworks, and other factors that loom over distressed M&A under the IBC are the main causes of this skepticism.

These issues need to be resolved by clear regulations, uniform due diligence standards, and creative deal structures if the IBC is to achieve its objective of successful corporate rescue. Although there has been progress in resolving these issues with recent court rulings and IBBI amendments, more work needs to be done to boost investor confidence in distressed acquisitions.

As the IBC framework continues to evolve, successful distressed M&A will require specialized expertise, innovative structuring, and careful navigation of the unique legal complexities that characterize acquisitions under CIRP.