For the record, the government is keen to improve operational efficiencies of the insolvency resolution process, and acutely aware of the need to expeditiously free up sunk capital of bankrupt firms. Several legislative and administrative measures have been taken apparently with this intent, and more are in the offing.
However, if anything, the time taken for the resolution has only increased over recent quarters, with some cases taking longer than 600 days to be settled, against the stipulated 180 days. There are also multiple other issues impinging on the process, such as judicial delays and an insufficient pool of resolution professionals skilled in multiple relevant disciplines. Instances are there of the tribunals concerned undermining the sanctity of the process, by intervening at inappropriate stages, and virtually overturning the resolution plans approved by the Committee of Creditors.
Not for nothing that a three-judge bench of the Supreme Court, while pronouncing a decision to liquidate Jet Airways last week, had some harsh words regarding for the insolvency resolution proceedings in the country. The apex court even put the National Company Law Tribunal (NCLT) and its appellate body (NCLAT) to notice for ignoring its orders or acting in defiance while ordering the liquidation of the airline.
Over 16 pages of the 169-page order dwelt on what the bench – comprising the outgoing chief justice DY Chandrachud and justices Manoj Misra and JB Pardiwala – felt were the shortcomings of the Insolvency and Bankruptcy Code of 2016 (IBC) and recommendations for reforms.
The court did not spare any of the parties involved in insolvency proceedings including successful resolution applications for their lackadaisical approach towards resolving insolvency and bankruptcies. “Scrupulous following of the provisions of the Code along with behavioural and ethical discipline is especially required from the key participants of the IBC who are central to its design i.e., the adjudicating authorities, corporate debtor, resolution professionals, committee of creditors, potential and successful resolution applicants, approved valuers and liquidators,” the order read.
Referring to how the Jet Airways insolvency resolution was handled, the apex court said: “This case is an eye opener… We would also like to definitely say something as regards the functioning of the NCLTs and NCLAT.”
Here’s a look at what the court has observed and some context:
On the NCLT’s functioning
It is well documented that very few corporate insolvency resolution process (CIRP) cases are completed within the IBC-stipulated timeline of 180 days (with a one-time extension of 90 days). The outer limit for resolution was set at 330 days in 2019. Most cases exceed even this. As of June 2024, more than 68% of ongoing CIRP cases took more than 270 days to be resolved, according to the last published quarterly newsletter of the Insolvency and Bankruptcy Board of India (IBBI). In the 58 insolvency cases for which resolution or liquidation orders were passed in April-September 2024, the process took 761 days on average.
The apex is unhappy about this. In its order, it noted that many tribunals were not working a full day. “There is often a shortage of members in the tribunals and inadequate infrastructure to support their functioning… A shortfall of members and the lack of requisite strength has led to tribunals only sitting for a few days of the week or a few hours in a day. Even in tribunals where there is no vacancy, the absence of requisite infrastructure has forced the benches to share courtrooms or halls on a rotation basis.”
The NCLT has one principal bench and 15 division benches, which together have 30 courts. The tribunal’s website says that only 13 of these courts function on a full-time basis. Further, against the sanctioned strength of 31 judicial members and 31 technical members, the tribunal has 21 judicial members and 22 technical members as of September 30, as three members retired towards the end of the month. This has meant some members preside over more than one bench.
For instance, of Delhi’s five division bench courts, only one was functioning on a full-day basis. One court did not have a hall and was functioning in the hall of another court on a half-day basis. Also, the Delhi division is short of two technical and one judicial member.
The working status of the benches published on the NCLT website shows that some members preside over the bench in one division during one half of the day and the bench of another division in a different state in the other half. There is also an instance of a judicial member presiding over three division benches – Guwahati, Jaipur and Cuttack. As a result, the tribunal’s court works only half a day 2-3 times a week.
The Supreme Court wants vacancies in the tribunals to be filled with experts who have adequate domain knowledge in the field. It has also called for strict mandates regarding the functioning of the tribunals within its normal working hours.
Interference and delays
The apex court did not take kindly to the tribunals interfering in the resolution process or acceding to requests of successful resolution applicants – the company selected by the creditors to turn around the debtor – for relief on complying with the resolution plan. Such interventions have been among the causes of delays in finalising a resolution plan. It said that tribunals need to respect the commercial wisdom of the committee of creditors (CoC). The court said this would require the tribunals to rethink their approach towards admission and disposal of insolvency matters, without acting as a “rubber stamp authority”. A CoC is constituted by the financial creditors (mostly banks and other lenders) of a debtor.
On delays caused by the tribunals, the court observed, “It has been noticed over a period of time that there is a serious lack of timely admission and disposal of the applications filed as regards the initiation of CIRP, approval of the resolution plan and liquidation. This only adds to the uncertainty of the process and prolongs the dispute thereby jeopardizing the interest of all the stakeholders involved.”
Noting that the tribunals often accede to requests of successful resolution applicants for leniency, the court reiterated, “The NCLT and NCLAT must not entertain such repeated attempts at violating the integrity of a CoC-approved Resolution Plan by accommodating the incessant requests of the successful resolution applicants. The exercise of discretion as regards altering the binding terms of the resolution plan, including the timelines imposed, must be kept at a minimum, at best.”
Exercising oversight
The court had some advice for the CoC, the resolution applicants and the government. It said as the commercial wisdom of the CoCs “assumes a position of superiority and becomes binding on all the stakeholders”, the CoCs should approve/reject resolution plans placed before them exhibiting fairness and with good reasons. To the successful resolution applicants, it said that they cannot treat their obligations as optional or conditional, nor can they abdicate their responsibility in the face of unforeseen obstacles. “Their efforts must reflect a determination to implement the plan fully and to rejuvenate the debtor company.”
To the government, the three-judge bench suggested that the possibilities of better enforcement of the standards and practices enumerated in the guidelines for CoC should be explored through an independent mechanism under the auspices of an oversight committee instead of making them self-regulatory. That apart, it has suggested that the IBC statutorily provide for the constitution of a monitoring committee by the CoC once the plan has been approved for a smooth handover of the corporate debtor to the successful resolution applicant. There is no such provision in the Code and the NCLT orders the constitution of such a committee at present.
From: financialexpress
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