Why IT Company Creditor Challenges Are Rising

Did you know that over 60 per cent of IT startups fail within the first five years, leaving creditors grappling with unpaid debts? The fast-paced nature of the IT industry, combined with high-value intangible assets and intricate contractual obligations, makes debt recovery particularly challenging. This article explores the key IT company creditor challenges, offering actionable insights for business leaders navigating insolvency scenarios.

When an IT company declares bankruptcy, creditors face multiple obstacles. Unlike traditional businesses with tangible assets, IT companies often hold proprietary software, patents, and digital infrastructure, which are much harder to value and liquidate. Add to this the legal complexities of frameworks like India’s Insolvency and Bankruptcy Code (IBC), and the process of claim filing, debt recovery, and participation in the Committee of Creditors (CoC) becomes daunting.

A Deeper Look at IT Company Creditor Challenges

The Elusive Value of Intangible Assets

Intangible assets like software licences, algorithms, and intellectual property (IP) often constitute the largest portion of an IT company’s value. Determining their market value is complex and subjective, directly impacting the recovery percentage for creditors. According to PwC India, intangible assets account for over 70 per cent of the total enterprise value in tech startups. This makes valuation a primary obstacle and a key IT company creditor challenge.

Navigating Complex Debt Recovery Mechanisms

Recovering dues from a bankrupt IT company is seldom straightforward. Creditors must navigate a maze of legal claims, prioritisation of secured versus unsecured debt, and complex IBC procedures. A Deloitte report reveals that creditors in IT insolvency cases recover only an average of 35–50 per cent of their claims, significantly lower than in traditional manufacturing sectors. This is a crucial point for anyone facing an IT company creditor challenge.

The Dynamics of the Committee of Creditors (CoC)

The CoC plays a central role in deciding the resolution plan. Creditors must actively participate, understand their voting rights, and evaluate offers from potential investors. Mismanagement or delayed participation in CoC meetings can drastically reduce recovery potential. Statista estimates that over 40 per cent of IT insolvency cases face delays due to disputes within the CoC. This highlights the importance of proactive engagement and is a significant IT company creditor challenge.

Legal and Regulatory Complexity

Filing claims requires strict compliance with IBC timelines, documentation, and proof of debt. A single legal misstep can result in a rejected claim. Moreover, cross-border creditors face additional hurdles related to international insolvency laws and foreign asset claims. McKinsey estimates that cross-border IT insolvency cases take 40 per cent longer to resolve than domestic cases, costing creditors valuable time and resources. This is a massive IT company creditor challenge that demands expert attention.

Operational Risks During Insolvency

While insolvency proceedings continue, the IT company’s operations may halt, affecting revenue streams and reducing the asset pool. Creditors must anticipate potential operational disruptions when evaluating their debt recovery strategies. A McKinsey study highlights that operational stagnation can reduce the recoverable value by up to 25 per cent, further emphasising IT company creditor challenges.

Real-World Case Study

Consider a mid-sized Indian IT firm with proprietary AI software and multiple SaaS contracts. Upon filing for bankruptcy, the company’s creditors, including venture capitalists and banks, struggled to accurately value these intangible assets. Active engagement in the CoC and expert legal advice allowed some creditors to eventually recover approximately 48 per cent of their claims. This case underscores the importance of specialised knowledge to overcome these IT company creditor challenges.

The Way Forward: Navigating a Complex Future

The IT sector will continue to generate high-value intangible assets, making IT company creditor challenges more complex. As AI, blockchain, and SaaS models dominate, they create assets that are difficult to liquidate. This heightens the importance of expert guidance in claim filing, debt recovery, and CoC participation. Looking ahead, governments are tightening frameworks like the IBC to streamline the process, while specialised distressed asset funds are emerging to purchase bankrupt IT assets, offering creditors faster liquidity.

Actionable Takeaways for Creditors

To overcome IT company creditor challenges, business leaders and creditors should:

• Engage Early in IBC Processes: Ensure timely claim filing and active participation in the CoC.
• Hire Valuation Experts: Customise strategies with specialists to appraise intangible assets like software, patents, and proprietary algorithms.
• Understand Legal Nuances: Stay updated on amendments to the IBC and international insolvency regulations.
• Prepare for Operational Disruptions: Incorporate realistic recovery timelines and risk buffers into your strategy.
• Collaborate with Specialised Consulting Firms: Gain cross-functional expertise in finance, technology, and legal aspects to master the IT company creditor challenges.

Conclusion: Strategic Preparedness is Key

The complexity of IT company creditor challenges is only set to increase. Proactive engagement, expert advice, and strategic planning are essential for creditors to maximise their debt recovery and minimise legal risk. The future belongs to those who act decisively and strategically in a turbulent market.

About LawCrust

LawCrust Global Consulting Ltd. delivers cutting-edge Hybrid Consulting Solutions in Management, Finance, Technology, and Legal Consulting to ambitious businesses worldwide. Recognised for our cross-functional expertise and hybrid consulting approach, we empower startups, SMEs, and enterprises to scale efficiently, innovate boldly, and navigate complexity with confidence. Our services span key areas such as Investment Banking, Fundraising, Mergers & Acquisitions, Private Placement, and Debt Restructuring & Transformation, positioning us as a strategic partner for growth and resilience. With an integrated consulting model, fixed-cost engagements, and a virtual delivery framework, we make business transformation accessible, agile, and impactful.

For expert legal help, please contact us:

• Email: inquiry@lawcrustbusiness.com