The Insolvency and Bankruptcy Code (IBC), 2016, is among the most crucial structural reforms undertaken by this government. Yet, for IBC to be effective, the principles at the heart of the legislation must be respected.
First, there has to be timely outcomes within 180 days (270 days for rare, complex cases), failing which there will be the credible threat of liquidation.
Second, commercial decisions regarding resolution and viability should be taken by the Committee of Creditors (CoCs), whose money is at stake.
Third, the National Company Law Tribunal’s (NCLT) role should be adjudicating critical issues of justice, such as compliance with procedural requirements, overseeing the Insolvency Professional (IP), and adjudicating on voidable transactions and potential penalties.
With the last two principles of IBC being betrayed, the core of the code —early resolution — has been regularly compromised. The recent judgment in the ‘Arcelor Mittal’ case holds out some hope. But the court’s observations on the time taken by National Company Law Tribunal’s and the National Company Law Appellate Tribunal (NCLAT) to resolve disputes being excluded from the reckoning is a concern.
Delays to IBC start from the very admission of an insolvency petition. IBC envisages that the process of insolvency must be triggered, or disposed of, within 14 days. However, data suggests that NCLT takes an average of 24 days.
Crucially, IBC envisages that NCLT confirms the existence of a default, and some procedural requirements, for initiating insolvency proceedings. The code sought to aid early detection and resolution of stress, and also avoid clogging judicial bandwidth at the trigger stage. Yet, NCLT has sought to go beyond the grounds set out in IBC, applying the balance-sheet test in some instances and ascribing ulterior motives in others. NCLT should delimit its role and apply judicial discretion on other matter.
Once proceedings are initiated, the resolution plan of the debtor is left to commercial forces. These principles, and the credible threat of liquidation, made the 180 days’ timeline envisioned in IBC plausible. And yet, this hasn’t resulted in resolution or liquidation in more than half — even the largest and most visible — of the cases. The application of the judiciary’s bandwidth not made in a manner envisaged under IBC is one reason for delays in the resolution process.
During arguments in the ‘Arcelor Mittal’ case, the Supreme Court seemed to be alive to some of these issues. In some statements, it reiterated the primacy of the commercial role of the CoCs and NCLT’s role in only following the acceptance of the resolution plan. It emphatically stated that NCLT and NCLAT are “not the supervisory authority” in commercial matters during the insolvency resolution process.
And yet, in the final judgment, the court sought to strike a balance between ‘timely completion’ and ‘corporate death’. In doing so, it stated that “time taken in litigation ought to be excluded”. The court stated that NCLT and NCLAT would not be ‘tardy’ in decision-making. But if the decision took longer than 270 days, it would preclude a viable resolution plan from being implemented. It is here that the court could have restated their observations regarding NCLT and NCLAT limiting their roles .
The Corporate Insolvency Resolution Process Regulations, issued by the Insolvency and Bankruptcy Board of India, state that where the amount claimed by a creditor is uncertain, the resolution professional shall make its best estimate based on the information available, and revise the estimate of the claims on the additional information, if required. This would allow the resolution process to continue, with such contentious claims being resolved subsequently — without adjudication by the tribunals will contribute immensely to IBC’s success.
Source : Economic Times