Causes of Inordinate Delays in the IBC and the Elixir to Cure Them - Part II
[Akshat and Arun are students at Rajiv Gandhi National University of Law, Patiala, Punjab.]
This is the second part of the two-part blog on the Causes of Inordinate Delays in the IBC and the Elixir to Cure Them (see Part - I here). This part discusses the situation concerning judicial delays pertaining to NCLT and NCLAT benches.
NCLT and NCLAT Benches: The Focal Point of Judicial Delays
NCLT is the only adjudicating authority under the IBC framework, for corporate persons. Once an application under IBC has been acknowledged by the NCLT, then the aggrieved party, as per the order of NCLT, can prefer an appeal before the NCLAT. A major chunk of the existing literature suggests that the slow judicial process acts as a hindrance to the increasing non-performing loans (NPLs). Court involvement is non-negotiable for guaranteeing the rights of various parties involved and can proliferate ex-post efficiency by acting as a coordination tool.
One of the biggest reasons for the delay in the time-bound process of insolvency is the lack of operational benches (both NCLT and NCLAT) and the vacancy in terms of members present. The SC, in a petition filed by the NCLT and the Appellate Tribunal Bar Association, observed that only 39 member spots were filled up at present against the sanctioned strength of 63. The SC also observed that the depletion in the number of members would adversely affect the smooth functioning of the Tribunals.
Furthermore, another problem plaguing the operation of NCLTs is the broad array of cases these tribunals hear apart from the petitions under the IBC. Cases under the Companies Act 2013 also fall under the jurisdiction of NCLT, and can be appealed to the NCLAT in case of a grievance. Apart from this, NCLAT also has the exclusive jurisdiction as an appellate body for orders passed by the National Financial Reporting Authority (NFRA) and Competition Commission of India (CCI). All of this puts a tremendous amount of workload on the NCLTs and NCLATs, which results in inefficiency to roll out the insolvency proceedings in the prescribed time-bound manner. Hence there is an exigency to reappraise the usefulness of the role of courts in the CIRP process.
The plausible solutions to these problems are as follows:
Even though a few junctures of a restructuring process necessitate judicial participation, the bulk of technical processes could be handled outside the courts in theory. As a result, courts' workload could be reduced, allowing them to focus on the prompt resolution of those complex matters that require court intervention. Restricting the role of the courts to situations when it is necessary to increase overall productiveness by allowing the exit of unviable businesses (which in turn strengthens market selection). This change should be accomplished as soon as possible so that precious resources can be released and redirected to more productive purposes. It is a known fact that all insolvency cases do not take 270 days to be dealt with, as some matters are of smaller nature and take lesser time to resolve. Hence it would undoubtedly be very beneficial to view insolvency resolution cases through the lens of a multi-route stratagem. The Woolf committee too implemented a similar method in England in 1998. The multi-track procedure yields a malleable system and does not give any uniform system for handling cases, unlike the rigid systems offered for claims in the fast track or the small claims track. On the contrary, it provides a diverse array of tools for the management of cases. These tools include standard directions, pre-trial evaluation, and conferences on case management, and they can be employed in a flexible combination manner to cater to the requirements of individual cases. Hence, three tracks could be proposed based on the default threshold taking inspiration from the Woolf committee. These are as follows:-
the fast tracks;
the small claims track; and
Persistent delays with respect to the execution of the code could be alleviated if, in addition to the already existing compulsory overall timeline for CIRP, compulsory timelines are incorporated in all junctures of CIRP. For example, we could have a deadline for the phase of admission of the application by NCLT, a deadline for the approval of the resolution plan, and so on for the remaining aspects. The inclusion of consolidated timelines such as these might result in a change in behaviour of the courts in executing such steps in a strict manner and not just keeping the overall deadline in hindsight. Parallel reasoning could be established from the indirect taxation mechanism in India that existed before the introduction of GST. The rules prior to GST were poorly formulated and barely eased the adjudication of demand notices under strict schedules, as opposed to the present GST law that has included the word 'shall' at various points to ensure quick resolution.
The government can also designate specific benches of NCLT for the sole purpose of hearing insolvency petitions. The same was also expressed by the Standing Committee on Finance in its report on the subject ‘Implementation of Insolvency and Bankruptcy Code (IBC)-Pitfalls and Solutions’ released on August 3, 2021. Alternatively, the government can also establish a separate tribunal for hearing petitions filed under the Companies Act and appeals filed against the orders of CCI to reduce the burden of the excess workload from NCLTs and NCLATs. In the meantime, supplementary courts may be assigned to the NCLTs which experience heavy IBC traffic, such as Mumbai and Delhi.
The IBC was envisioned as a revolutionary step towards ease of doing business in the facet of the Indian economy. But the unrequited delays in the resolution process, which were the primary reason for the failure of its predecessor, are persistent in the IBC even after revamping the whole insolvency framework. These backlogs foster several problems, such as exorbitant haircuts (amount of dues forgone) during the resolution process, commercial uncertainty, an increase in the non-performing assets, and the destruction of the value of existing assets. These factors have been a major blow to the rapidly expanding Indian economy.
Thus, in light of dealing with these persistent problems, we have tried to provide some novel solutions in the aforementioned discussion. These solutions, if implemented in the right way, can prove to be invaluable in the struggle against rampant insolvency resolution delays.