The Insolvency and
Bankruptcy Code is a comprehensive framework covering all the Insolvency and
Bankruptcy issues of the companies in distress, bankrupt individuals and
Partnerships (other than financial firms) seeking to revive their financial
viability in an expeditious manner. IBC was the result of the revelation that
time is the essence in a corporate insolvency resolution, which was an
invaluable lesson learnt from the failure of SICA. Hence the IBC framework
envisages a time bound insolvency resolution procedure which is to be completed
within a time frame of 330 days, the failure of which shall invoke the
liquidation procedure inevitably under the non-intrusive oversight of the
National Company Law Tribunal (NCLT). Under the earlier regime, the corporate debtor could have indefinitely
continued to enjoy the protection given under Section 22 of Sick Industrial
Companies Act, 1985 or under other such enactments which has now been forsaken.
The intention of the introduction of the Code was to streamline and ease the
process of corporate insolvency aiming for a time bound insolvency resolution
thereby preventing the erosion of the enterprise value of the Corporate Debtor
in distress and promote ease of doing business in the country.
By replacing the concept of ‘debtor in possession’
with the ‘creditor in control’ IBC has put its entire faith on the commercial wisdom
of the Creditors and the integrity of the Insolvency Resolution professionals.
Under the Code the management and control of assets of
the debtor are handed over to an Insolvency Professional (IP) who is
responsible for operating the debtor’s enterprise as a going concern and
managing the corporate insolvency resolution process (CIRP) besides performing
other crucial functions. It proceeds with an intrinsic assumption that financial creditors are
fully informed about the viability of the corporate debtor and feasibility of
the proposed resolution plan and hence has not provided any ground to challenge
the “commercial wisdom” of the individual financial creditors or their
collective decision before the adjudicating authority making it non-justiciable.
IBC is being viewed as the new mantra for pulling down the NPA mound which is otherwise
growing steadily like the nose of Pinocchio.
Even
though the Code was enacted with an aim for a speedy resolution of the
insolvency process the ground realities are telling a different story
altogether. When one
critically examines the progress that the IBC regime has made during the past
three years it can be seen that the system has failed to meet the expectation
of the financial market and the resolution process is exhibiting signs of
sluggishness, which was the malady of the previous regime IBC intended to
resolve. As on February 2019, i.e., within 27 months of
operationalisation of the IBC, as many as 14,000 applications had been filed
for initiation of CIRPs under the IBC. From the data available with IBBI, it is
understood that, as on March 31, 2019, the commencement of CIRP has been
ordered only with respect to 1858 Corporate Debtors.[i] As
per the provisions under IBC, the NCLT should, within 14 days of receipt of an
application for initiating a corporate insolvency resolution process, admit or
reject the application. Due to the large number of cases pending before the
NCLT, this time line stipulated under the Code is not generally being adhered
to. There are several cases where the admission itself is taking more than 6
months from the date of receipt of the application.
Similarly
there are scores of instances where the stipulated time period for completion
of the CIRP process[ii]
were stretched to more than double of the prescribed limit. For instance the
Essar Steel case was pending more than 600 days after its admission before the
NCLT. It is reported that about 32% of the ongoing Corporate Insolvency
Resolution Process (CIRP) cases have surpassed the time ceiling of 270 days
(which existed before the 2019 Amendment), with an additional 20% having
crossed the six-month deadline.[iii]
The
Challenge of Dual Responsibilities
It needs to be understood that the NCLT
Benches are simultaneously acting as the judicial forum for both the matters
under the Code and the Companies Act 2013. The Company Law Boards (CLBs) used
to receive around 4000 new cases annually[iv] which
are now coming before the NCLT Benches. Further, with the formation of the
NCLTs all the cases which were pending before the Company Law Boards (CLB) have
been transferred to the NCLTs. As of March 2015, there were around
4,200 pending CLB cases which were transferred to NCLTs.[v] By
virtue of the transitional provisions of IBC several cases which were pending
before the BIFR or AAIFR for rehabilitisation have also been transferred to
NCLT[vi]. In
view of the same we can see that the NCLTs have started functioning with an inherited
backlog of cases. It is pertinent to note here that to the exception of New
Delhi and Mumbai, all other NCLT locations including Chennai, Bengaluru and
Chandigarh are having only a Bench or two that may not be sufficient to give
justice to the matters that come up for their consideration.[vii]
Judicial Intervention
Some of the judicial
interpretations made with respect to the timelines stipulated under the Code
without giving due consideration to the underlying legislative intent have also
stifled the concept of time bound resolution. The NCLAT had, in one of its
decisions, held that if an application is filed by the ‘Resolution
Professional’ or the ‘Committee of Creditors’ or ‘any aggrieved person’ for
justified reasons, it is always open to the Adjudicating Authority/Appellate
Tribunal to ‘exclude certain period’ for the purpose of counting the total
period of 270 days, if the facts and circumstances justify exclusion, in
unforeseen circumstances[viii]. Such interpretations made by the adjudicating
authorities greatly dilute and undermine the concept of timely resolution which
is one of the cornerstones of the Code.
Legislative
Gaps
Apart from these
infrastructural handicaps, there have been certain legislative gaps under the
Code leading to presumptions and interpretations beyond the legislative intent.
This lack of clarity has on many occasions dragged the matters for judicial
review leading to prolonging litigations. For instance the Code has originally
envisaged a waterfall mechanism for distribution of proceeds from the sale of
liquidation assets. However it did not provide for a similar waterfall for
distribution of realisation under a resolution plan amongst the creditors. The
distribution of realisation under resolution plans has been a bone of
contention in several CIRPs and caused prolonged litigation and undue delay in
completion of the process, occasionally disturbing pre-insolvency entitlements
of creditors.
Similarly though the
commercial decisions of the Committee of Creditors (CoC) are not generally open
to any judicial review by the Adjudicating Authority, the question as to what
is commercial and what is not has always been a debatable issue. It was not
clear whether inter se distribution
of realisation under resolution plans among creditors is a commercial matter or
not. NCLAT had in one of their judgments[ix] held
that the CoC cannot distribute realisation amongst creditors, as the FCs
constituting CoC, being claimants at par with other creditors, have a conflict
of interests.
Other
Infrastructural Shortfalls
The Insolvency
Professionals play a key role in the insolvency proceedings as the resolution
professionals (RP) and as liquidators. Their role ranges from the evaluation of
the distressed company, its management during the resolution proceedings,
preparation and implementation of the resolution proposal and the distribution
of the realised proceeds. In performing these functions it is important that
they maintain transparency and integrity in their functioning to maintain the
credibility of the system. During the past two years there have been several
complaints raised against the integrity and independence of the Insolvency
Professionals acting as the Resolution Professionals. There have been instances
of the IPs failing to record the claims of the creditors, unilateral decisions
being taken keeping the CoC in dark trying to pursue the IP’s own
interest. In one of the Orders of the
IBBI Disciplinary committee it has been recorded that the IP failed to act in
the best interests of the corporate debtor and its creditors but has pursued
his appointment as the RP and as liquidator depriving CoC of its rights to
resolve the insolvency of the Corporate Debtor[x].
There have also been instances where the IP was found to be acting in collusion
with the Resolution Applicant[xi] or
was acting only on behalf of one of the creditors without the approval of CoC[xii].
The Information
Utilities were put to place considering the fact that the asymmetric
information can seriously undermine the insolvency and Bankruptcy process and a
centralised database shall cut short the otherwise long-drawn process for
obtaining all the relevant information and establishing its veracity. Under the
provisions of the Code, a CIRP can be triggered when a default by the debtor
company has taken place and the IU enables a quicker initiation of cases by
providing access to irrefutable and transparent evidence of the default, along
with the identity of all the creditors, the terms and conditions of all
liabilities as well as the assets registered. IUs thus facilitate the formation
of the creditors’ committee within the stipulated period of 14 days from the
date of registration of a case.
When the IP is unable
to provide such evidence to the default the NCLT will have to call for further
evidence by notifying the stakeholders to evaluate as to whether a default has
indeed taken place. Presently this process is contributing substantially to the
delay involved in the Admission stage. It gives rise to two possible outcomes:
i)
The
delay in forming the creditors’ committee reducing the time available to agree
on a resolution plan. If the committee cannot agree on a resolution plan within
the specified time limit, the NCLT will order the liquidation of the company.
ii)
The
NCLT may have to exercise its judicial discretion extending the CIRP beyond the
time limit specified under the Code.
Both these
outcomes have negative consequences. The former creates a liquidation bias in
CIRP while the latter compromises the fundamental design of time-bound
resolution in the IBC.[xiii]
Further it is always
advisable to have multiple players to increase the efficiency of the
performance of IUs. The Viswanathan
Committee Report and the Joint Parliamentary Committee Report 2016 had envisaged
that be a competitive industry of IUs should exist with an interoperable
environment pointing out that in the event of centralisation there shall be
problems associated with the elevated profit, low-quality work of monopolies.[xiv] Both these reports had highlighted the fact
that a multiplayer environment shall encourage competition and drive down the
prices for queries and user filing charges. However currently NeSL is the only
Information Utility registered under the IBC framework and concerns have been
raised by many of the players of the Banking industry that the rates charged by
NeSL is on a higher side justifying the views of these Reports.
Impact of Insolvency
and Bankruptcy (Amendment) Act 2019
The IBC (Amendment)
Act, 2019[xv]
has brought the following key changes in the existing CIRP regime:
i)
Reiterated Timeline: The
Amendment has inserted a proviso to Sub Section (3) of Section 12 of the Code,
whereby it is clarified that the 330 days within which the CIRP is to be
mandatorily completed shall include any extension of the period of resolution
process granted under Section 12 and also the time taken in legal
proceedings in relation to such resolution process of the corporate debtor.
ii)
Waterfall Distribution Mechanism
under Resolution Plan: The Amendment Act provides that the
Operational Creditors shall be paid not less than the amount payable to them in
the event of liquidation of the Corporate Debtor or the amount payable to them
if realisations under the resolution plan were distributed in accordance with
the priority in the liquidation waterfall, whichever is higher. It also
provides that the dissenting Financial Creditors shall be paid not less than
the amount payable to them under liquidation waterfall. It clarifies that
distributions made in this manner shall be fair and equitable. This provision
shall apply to all ongoing CIRPs, including the ones where approved resolution
plans are under litigation.
iii)
CoC
Decision on Resolution Plan:
The Amendment has brought in a clear segregation between the commercial aspects
of insolvency resolution from judicial aspects by making it clear that the CoC
may approve a resolution plan after considering its feasibility and viability,
and the manner of distribution of realisation under the plan, keeping in view
priority of the creditors and their security interests.
iv)
Voting Impasse:
The Code provides for an Authorised Representative (AR) to represent a class of
Financial Creditors and to vote in respect of each Financial Creditor in the
committee of creditors (CoC). However, it was found difficult to secure the
requisite votes where the CoC has class(es) of Financial Creditors, who are
large in number, scattered all over the country and unorganised. To address the
difficulty the 2019 Amendment has brought in a change to the effect that an AR
shall vote for the Financial Creditors he represents in accordance with the
decision taken by the class with more than 50% voting share of the Financial
Creditors, who have cast their votes. This principle, however, shall not apply
to voting for withdrawal of applications.
These
amendments have been put to place with an intention to remove some of the
legislative gaps which were being utilised to challenge the CIRP proceeds and
CoC decisions leading to prolonged litigations delaying the resolution process[xvi]. However these changes are quite nascent and
are yet to be subjected to any judicial scrutiny. It is hence too early to
predict as to whether these changes shall continue to have the same impact
which was originally intended by the Legislature.
SUGGESTIONS
FOR CAPACITY BUILDING
v Considering
the increasing caseload of the NCLTs, it is necessary that Additional NCLT
Benches should be established at various locations.
v Currently
NCLAT is only available in Delhi even though substantial cases are rising also
from centres like Mumbai and Chennai. Hence Circuit Benches for NCLAT may also
be considered.
v The
capacity of the NCLT and NCLAT may be reviewed from time to time and necessary
infrastructure support must be provided.
v The
possibility of creating exclusive Benches for dealing with the matters related
to the Code, considering the underlying complexities, may also be explored.
v It
must be religiously ensured that the time frame stipulated under IBC is
strictly adhered to.
v While
the Economic Survey 2018-19 was published the facility for e-filing of
applications, petitions, appeals, replies, etc. had been made available only at
Delhi NCLT. The digitization and e filing must be expeditiously made available
at other locations also.
v Before
notifying the provisions related to Insolvency Resolution and Bankruptcy for
Individuals and Partnership firms it may be ensured that the DRTs are having
the sufficient manpower and adequate infrastructure to efficiently handle the
additional workload.
v Sufficient
regulatory measures should be put in place to ensure unbiased functioning of
the IPs thereby ensuring transparency in the Resolution Process to avoid any
conflict of interests.
v There
must be a robust mechanism to ensure the quality of the data available with the
IU. The authentication of the financial information available with the IU needs
to be duly scrutinised. Further the present technical infrastructure for
preserving the data must be periodically reviewed and strengthened to prevent
any loss of data and ensure the maintenance of confidentiality. It may be
ensured that the IU infrastructure is sufficiently strengthened by creating a
multi-player environment with interoperability.
[i]
See P.79, Chapter III ‘Monetary Management and Financial Intermediation’, Economic Survey 2018-19, Vol II,
Available at https://www.indiabudget.gov.in/economicsurvey/doc/vol2chapter/echap03_vol2.pdf (Last visited 20.08.02019)
[ii]
Under the Insolvency
and Bankruptcy Code (Amendment) Act, 2019 the existing threshold of 270 days
was modified to 330 days.
[iii]
See IBBI Newsletter
January-March, 2019; See also Amitabh Kant, “IBC delayed is IBC denied”
available at
https://economictimes.indiatimes.com/blogs/et-commentary/ibc-delayed-is-ibc-denied/
(Last visited on 20/08/2019)
[v]
See Crisil Report “
Strengthening of the Code”, available at https://www.crisil.com/content/dam/crisil/our-analysis/reports/Ratings/documents/2019/april/strengthening-the-code.pdf ; See also Amitabh Kant, “IBC delayed is IBC
denied” available at
https://economictimes.indiatimes.com/blogs/et-commentary/ibc-delayed-is-ibc-denied/
(Last visited on 20/08/2019)
[vi]
As of March 2019, the
CIRP for 378 companies ended in liquidation out of which 283 companies were with
BIFR or already defunct. See P 85 supra note 4
[vii]
See Constitution
of NCLT Benches, available at
https://www.ibbi.gov.in/uploads/whatsnew/Constitution_of_Benches_at_All_NCLT_Locations
(Last visited on 20.08.2019)
[viii]
See Quinn Logistics India P Ltd v Macksoft Tech ltd, (08.05.2019-NCLAT). See also IDBI Bank Ltd. and Ors. v. Anuj Jain and Ors. (30.07.2019 - NCLAT)
: MANU/NL/0339/2019
[ix]
Judgment dated 4th
July, 2019 of the NCLAT in the matter of Standard
Chartered Bank v. Satish Kumar Gupta
& Ors.
[x]
IBBI/DC/10/2018 Order dt 15.10.2018
[xii]
IBBI/DC/03/2018 dt 18.04.2018
[xiii]
See See Rajeswari Sengupta
and Anjali Sharma, “Challenges in the Transition to the New Insolvency and
Bankruptcy Code”, available at
https://thewire.in/law/insolvency-and-bankruptcy-code . (Last visited on
20.08.2019)
[xiv]
See p 1171, Anirudh Wadhwa, Kapil Wadhwa et.al
(eds). “Guide to the Insolvency &
Bankruptcy Code - Vol I, P 1135-1137; (Wadhwa Brothers Sales Corporation,
New Delhi, 1st Edn, 2019).
[xvi]
See A Resolve for
Resolution, available at
https://ibbi.gov.in/uploads/resources/94659461570db043622409c293e97a03.pdf
(Last visited on 20.08.2019)
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