In this piece, the author examines the operation of the IBC in post-COVID insolvency proceedings – commenting on how the NCLT needs to have more, better trained personnel with a judicial background so that the IBC can be applied in a flexible non-linear fashion to accommodate the peculiarities of a pandemic induced bankruptcy.
The Insolvency and Bankruptcy Code, 2016 (IBC) was envisaged as a law which would consolidate the prior existing fragmented legal framework related to insolvency and bankruptcy in India. It was enacted to expedite debt resolution and improve recovery rates. One of the salient features of this Code is the separation of judiciary from insolvency related matters and empowerment of adjudicating authorities to ensure expeditious resolution of such matters. One of the adjudicating authorities recognized under the Code is the National Company Law Tribunal (NCLT), for deciding insolvency cases relating to companies and Limited Liability Partnerships (LLPs).
Recently, a Parliamentary Standing Committee presented its report on the perils grappling the implementation of IBC and possible solutions. The Committee in its report has mentioned several pitfalls related to the NCLT in the field of insolvency and bankruptcy including the high pendency in NCLT on IBC matters and the questionable credibility of the judgments delivered. The IBC, by providing a rigid restructuring model has encumbered the NCLT. The Apex Court, in its recent order has also denounced the functioning of NCLT.
Due to the COVID pandemic, the commercial activity suffered a major setback. Governments across the globe amended insolvency laws of their land to keep the business activity alive and navigate through this crisis. For example, the Indian insolvency, in light of the pandemic introduced pre-pack insolvency process for the Micro, Small & Medium Enterprises (MSME).
Apart from these previous IBC amendments, certain more amendments and operational changes need to be made in the Indian insolvency regime in order to maximize its efficacy in post-COVID India, including a revamp and streamlining of NCLT. The high vacancy of judicial members in the NCLT, the availability of a standard procedure which overburdens the NCLT and the continuous litigation of NCLT judgments are some of the issues which need to be addressed. Failure on this count can kneecap the first consolidated insolvency law of India.
This article analyzes the high pendency of IBC matters in NCLT, the overwhelming workload inflicted upon the NCLT by the IBC and the quality of NCLT judgments delivered relating to IBC. While addressing these issues, it makes a comparative analysis with some matured insolvency regimes of the world to put forth some suggestions on how these issues can be resolved.
High Pendency of IBC matters in NCLT
An efficient judiciary is a must for the success of any insolvency regime. The capacity and capability of the judicial system determines the value maximization of assets and timely resolution of insolvency proceedings. Prior to the promulgation of the IBC, India had multiple laws for reorganization and liquidation as well as multiple adjudicating authorities. In an attempt to streamline the judicial system for IBC, NCLT was designated as an Adjudicating Authority. The NCLT is one of the four pillars in the Indian Insolvency proceedings, the other three being the Insolvency Professionals, Information Utilities and the Insolvency and Bankruptcy Board of India (IBBI). The report prepared by the Committee has presented a dismal picture of the NCLT. The performance audit of NCLT has revealed that over 13,000 IBC cases are pending with NCLT. Over half of the sanctioned strength in NCLT is vacant. Justice Chandrachud, in an order observed that the high vacancy in the NCLT has stalled its functioning. Failure to operate at the sanctioned strength at the very minimum, will not only affect the insolvency proceedings, but also the economy.
The G30 Report ‘Reviving and Restructuring the Corporate Sector Post-Covid’ has given a warning about a possible proliferation of insolvency cases in the post-COVID economy. Singapore, in spite of having one of the best scores in insolvency resolution and an efficient judiciary, has increased the resources for the judiciary, including the number of judges. Even the US Congress was quick in recognizing the need to recruit more bankruptcy judges in light of the COVID crisis. Similar steps in the Indian context are the need of the hour.
Overburdened NCLT under a rigid law
Apart from high pendency, the rigid and linear model of the IBC has also fettered the NCLT. The IBC envisages the revival of the corporate debtor and aims to keep liquidation as the last resort. A standard procedure has been laid down and is to be followed which broadly is that the – NCLT examines the insolvency resolution application, appoints the Insolvency Resolution Professional (IRP) and scrutinizes the resolution plan. However, the question that needs to be considered is why liquidation is the last option for failing firms even though as per Insolvency and Bankruptcy Board of India (IBBI) Report, around half of the Corporate Insolvency Resolution Process (CIRP) end up in liquidation and the average recovery is around 42.5%. Absence of timely liquidation mechanism leads to high erosion in the value of assets. In contrast to this, Germany’s insolvency regime, even with a high liquidation rate, has one of the highest recovery rates globally due to timely liquidation. If any failing firm is willing to exit the market, timely liquidation can preserve the value of assets as well as reduce the burden on NCLT.
In the UK, where the insolvency law originated and Singapore, there is a non linear modeled insolvency law which offers a wide variety in terms of procedures to firms undergoing insolvency and bankruptcy. Additionally, the insolvency laws in these regimes interact with other legal frameworks in their country. This has ensured the efficiency of the insolvency framework in these countries, even after the COVID crisis. In India, the NCLT operates in silos. Debt Recovery Tribunal is another statutory body in addition to the NCLT to provide expeditious debt resolution mechanism for banks and finance institutions. Due to the functioning of both these tribunals in silos, there is inconsistency of judicial outcomes in matters related to debt recovery.
Germany, one of the most efficient insolvency regimes, earlier had a linear insolvency law, under which the firms undergoing insolvency were subjected to the same procedure. Recently, it has implemented its new insolvency law in order to make corporate restructuring more efficient and flexible. In order to mitigate the economic crisis due to COVID, it substantially reduces the burden on courts. India too, to mitigate the crisis, recently introduced Pre-Pack Insolvency Process for MSMEs to mitigate the crisis. However, even though it is envisaged as an out of court insolvency resolution process, it is heavily reliant on the NCLT.
Credibility of NCLT
In addition to the high pendency and vacancy in the NCLT, the Committee has observed that the quality and credibility of NCLT judgments is also questionable. NCLT judgments are extensively litigated in the National Company Law Appellate Tribunal (NCLAT) and the Apex Court of the country delaying the resolution process. One of the reasons for this is that the NCLT has on a number of occasions delivered erroneous judgments. For instance, in the DHFL Crisis, the NCLAT was quick in staying the NCLT Order directing the Administrator to let Mr. Wadhavan (an errant promoter) to present his settlement plan to the committee of creditors. Additionally, NCLAT recently put a stay on the takeover of Videocon by Vedanta. Although the resolution plan had been approved by the NCLT, the NCLAT observed that Vedanta was paying “almost nothing”. The primary reason behind the poor quality of judgments in NCLT is that the judicial members of the NCLT are not adequately trained. Even the Committee has recommended these judicial members of the NCLT be trained under a streamlined process.
The Centre for Insolvency and Bankruptcy (CIBS) is the apex institute for imparting education and training to judges in the field of insolvency and bankruptcy law. This Centre must be consolidated and utilized to efficiently train the judicial members of the IBC. The National Judicial Academy was formed to strengthen the administration of justice in India by imparting judicial education. It has utilized some creative pedagogy to fulfill its objective. Judges across the country are brought together and provided “a forum to jointly identify the major obstacles facing the administration of justice and develop appropriate solutions for overcoming these obstacles.” This model can provide a roadmap for an efficient revamp of CIBS.
The Report has suggested that High Court judges be appointed as the judicial members of NCLT. However, there is a high vacancy in the High Courts as well. The Parliament could instead consider lateral hiring for IBC related matters. Few years ago, the Union Government had introduced lateral hiring in the bureaucracy. This initiative was taken as there is a huge vacancy the Indian Administrative Service (IAS). This would also bring in the expertise of the private sector to the administration, thereby improving efficiency. As compared to UPSC, IBC is at a much nascent stage and NCLT has a high vacancy. There are suspicions that these laterally hired judges can abuse their power. As per the Report, currently a large number of NCLT judges are from lower judiciary and there have been instances of misuse of power. In order to balance the situation, an annual performance appraisal mechanism could be adopted to keep the NCLT under vigil. Short term appointment and chance to serve the judiciary can attract the practitioners from top notch firms and experienced academicians in insolvency matters. The advanced insolvency regimes have specialized judges for bankruptcy matters.
NCLT in post-COVID India: The Way Forward
In times of economic crises, the insolvency regimes do witness reforms to address these crises. Five years down the promulgation of IBC, this is the first economic crisis being faced. Foreign investment is essential to ensure expeditious recovery of economy after COVID. If the aim is to make India an attractive investment destination, the IBC must be reformed into a flexible and diversified model instead of a rigid model. This reform is also essential to provide an effective resolution mechanism to the soaring number of cases filed under IBC.
The NCLT being one of the pillars must be customized to the post-Covid Insolvency landscape. The operational loopholes in NCLT must be addressed and the vacancies should be filled on an urgent basis. Rather than keeping a rigid model of insolvency, liquidation as a restructuring option must be made available to the firms even at the beginning. This will ensure ease of business and reduce the workload of the overburdened NCLT. Lateral and short term hiring of NCLT judges can be initiated to ensure that the NCLT is not deprived of the expertise of insolvency and bankruptcy lawyers.
One of the issues highlighted by the Committee to consolidate the IBC was the formation of a Code of Conduct for the Committee of Creditors (CoC). As indicated by the Ministry of Corporate Affairs (MCA), the same is in progress. Along with this Code of Conduct, the other issues in the IBC, such as the high vacancy and questionable credibility of NCLT can be addressed by the Parliament in the form of amendment to IBC, like it was recently done for the Pre-Pack for MSMEs.
Prakriti is a Second Year student at the Hidayatullah National Law University, Raipur
Image Source: The Economic Times
Categories: Corporate Law, COVID-19, Legislation and Government Policy