How to save the IBC from the NCLT

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June 22, 2021 4:30 AM

Failure to reform the NCLT will bleed the banking sector and kneecap the government’s flagship reform

The NCLT had also asked the Insolvency and Bankruptcy Board of India to see whether confidentiality was maintained during the corporate insolvency resolution process as Twin Star's bid was very close to the liquidation value, which was meant to be confidential.The NCLT had also asked the Insolvency and Bankruptcy Board of India to see whether confidentiality was maintained during the corporate insolvency resolution process as Twin Star's bid was very close to the liquidation value, which was meant to be confidential.

The success of the Insolvency and Bankruptcy Code (IBC) rests on three institutional pillars: insolvency professionals, the Insolvency and Bankruptcy Board of India (IBBI, the insolvency regulator), and insolvency courts (National Company Law Tribunals, or NCLTs). While insolvency professionals and the IBBI have performed admirably in expeditious resolution of large stressed accounts, it is the third frame of the triptych, i.e. NCLTs, whose functioning has been disappointing.

The IBC provides a stringent timeline for completion of the insolvency process, but once a resolution plan is ratified by the committee of creditors, it must be approved by the NCLT. Unfortunately, there have been inordinate delays at the NCLT, mainly due to inconsistent application of law, lack of institutional capacity and the tendency to entertain frivolous cases by promoters and disgruntled creditors. Urgent corrective measures are needed to preserve the efficacy of the insolvency process.

Dedicated insolvency court

The NCLT hears cases arising under the IBC as well as the Companies Act, whereas the NCLAT (the appellate tribunal) is also the forum against orders by the Competition Commission of India. The government may either designate certain courtrooms at NCLTs solely for IBC matters or may establish a separate tribunal for matters under the Companies Act. In the interim, additional courts may be added to NCLTs which see heavy IBC traffic, such as Mumbai and Delhi.

Frivolous petitions

The Supreme Court has conclusively ruled on contentious issues under the IBC such as supremacy of commercial wisdom of financial creditors, subordinate status of operational creditors and bar on promoter participation. Regrettably, the NCLT continues to entertain petitions questioning settled positions. It is commonplace to find contrarian orders passed on emotive grounds bereft of legal reasoning which defy statutory provisions and the Supreme Court’s orders.
Erroneous decisions are set aside by fastidious benches at the NCLAT and the Supreme Court, but the appellate process takes time. The NCLT must dismiss frivolous matters at the threshold without expending scarce judicial time in pleadings and hearings. The procedural rules may be amended to enable NCLTs to summarily dismiss meritless filings.

Timelines for approval of resolution plans

The IBC is designed to make NCLTs’ approval of a resolution plan a ‘tick-the-box’ exercise without exercise of discretion on commercials of the plan. However, NCLTs routinely hear objections to financials of resolution plans filed by disaffected promoters and creditors up to several months after a resolution plan has reached the NCLT. The law should provide a limited window for filing objections to the resolution plan, and if the NCLT is taking unreasonably long to approve a plan then it must submit a report to the NCLAT, justifying the delay.

Appointing judges

The NCLT court comprises of a judicial and technical member. The overwhelming majority of judicial members are from the lower judiciary, as opposed to High Courts. Presence of a High Court judge has several advantages. Firstly, they carry greater gravitas before influential counsels who find it harder to obtain reliefs on flimsy grounds. Secondly, they possess greater experience in dealing with large and complex commercial disputes. Lastly, their stature enables them to better guide technical members lacking judicial and/or legal experience. Therefore, judicial members must exclusively be appointed from the pool of serving and retired High Court judges.

NCLTs’ projected case load is likely to rise. RBI predicts that the gross NPA ratio for banks may escalate to 14.8% by September 2021 under severe stress. In March, the Supreme Court lifted the moratorium on recognition of NPAs. Soon, banks will face a deluge of bad loans for whose resolution they will turn to NCLTs. The Supreme Court has also upheld provisions dealing with bankruptcy of personal guarantors and the relevant forum for their bankruptcy process is also the NCLT. At this juncture, we need a commercial court that guarantees certain timelines and predictable outcomes. Failure to reform the NCLT will bleed the banking sector and kneecap the government’s flagship reform.

The author is a corporate lawyer and a partner at AZB & Partners. Views are personal

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