This study aims to explore the role of information asymmetry in the corporate insolvency resolution process (CIRP) and its impact on decision-making by the Committee of Creditors. Despite the Insolvency and Bankruptcy Code (IBC) (2016), being designed to facilitate efficient resolutions, a significant proportion of cases results in liquidation rather than resolution. This paper examines how information asymmetry affects creditor confidence, leading to suboptimal liquidation decisions. This study argues that bridging the information gap by using institutional solutions like the idea of information utilities (IUs) as provisioned under the Bankruptcy Code of India, can build creditor confidence, reduce liquidation and promote transparency. This, in turn, would enhance the certainty of recovery, encourage stakeholders to pursue resolution rather than liquidation and streamline the insolvency process.
The research adopts a mixed-methods approach, combining quantitative data analysis with qualitative insights from stakeholder interactions. The quantitative component includes statistical analysis of secondary data from the Insolvency and Bankruptcy Board of India from 196 insolvency resolution cases and survey responses from 103 CIRP stakeholders. The qualitative component involves personal interviews, panel discussions and observations of National Company Law Tribunal proceedings. In addition, a law and economics framework and mathematical framework, is used to analyse decision-making under information asymmetry.
The IBC (2016) was enacted to maximise recovery and reduce resolution timelines. However, empirical data highlights significant challenges, including prolonged case durations, large creditor haircuts and a high proportion of liquidations despite lower recoveries compared to resolutions. One of the primary reasons for this anomaly is a lack of creditor confidence due to information asymmetry and limited transparency. Due to asymmetric information, creditors undervalue resolution prospects, often opting for liquidation even when resolution would yield higher returns. Empirical and secondary data reinforce the need to strengthen IUs to reduce delays and improve resolution rates. The study recommends suitable legislative amendments must be made to remove the scope of ambiguity in Section 215 of IBC (2016), mandating the disclosure of information to IUs and stringing the institution of IUs.
This study focuses on practitioner responses within the CIRP, including practical insights from advocates, creditors and resolution professionals. These responses reflect the need for strengthening the IU framework that will reduce information asymmetry, improve creditor confidence and ensure optimal outcomes in the CIRP process. Suitable legislative amendments will ensure that constitutional courts do not dilute the mandate of disclosure of information to the IUs.
CIRP ensures timely and high recovery for the creditors while keeping the company as a going concern. This approach helps maintain a balance between stakeholders’ recovery and social welfare. This paper provides a novel law and economics perspective on the role of information asymmetry in CIRP. By integrating theoretical models with empirical data (primary and secondary data), it offers practical insights into improving the resolution process under IBC (2016).
