Introduction
Delays at plan approval stage
Measures to reduce delays
The introduction of the Insolvency and Bankruptcy Code (IBC) was aimed, among other objectives , at reducing delays that had severely impacted the recovery rates for creditors in insolvency proceedings. The key reasons identified for these delays included lack of institutional capacity and excessive judicial intervention. Given these reasons, the procedure designed under the IBC prescribes timelines at various stages and cautiously assigns a limited role to the National Company Law Tribunal (NCLT) as the "Adjudicating Authority".
A recent report of the Standing Committee on Finance (2020- 2021) identifies two key stages where most delays occur in a corporate insolvency resolution process (CIRP):
- admission of an application for initiating CIRP; and
- approval of resolution plan by the NCLT.
There are systemic reasons for delay at the latter stage which need immediate redressal.
While the IBC separates commercial and judicial matters and specifies the instances where judicial intervention is permissible, the residuary powers of the adjudicating authorities are being used to seek intervention even where it was never envisaged. For instance, stakeholders have at times filed applications seeking declarations of law and guidance from the NCLTs. Further, the adversarial approach to IBC proceedings by stakeholders clogs up the system with several pending interim applications before the NCLTs. As a result, this either prevents processes from reaching the resolution stage or, in cases where it does reach the resolution stage, the interim issues become too complicated to be resolved. Therefore, the NCLT attempting to approve a resolution plan without first deciding on pending interim issues may not offer realistic solutions to the issues arising in the process and directions to NCLTs to prioritise resolution plan approval become meaningless, paying lip service to the goal of expediting resolution.
The IBC requires resolution plans to be approved by a committee of creditors (CoC) and thereafter by the NCLT. Once approved by the authority, the plan binds all stakeholders of the corporate debtor. While the CoC is duty-bound to take collective commercial decisions in the interests of all stakeholders, the financial creditors comprising the CoC may have different limitations and considerations. For instance, public sector banks inherently lack internal organisational flexibility and may not be driven by purely commercial considerations in fear of scrutiny and vigilance inquiries. For financial creditors that do operate on commercial parameters, the decisions do not always safeguard the collective interests of stakeholders. As a result, a resolution plan that does not adequately capture the interests of all stakeholders is often challenged before the NCLT by disgruntled parties. Moreover, unnecessary lawsuits instituted by the erstwhile management of the corporate debtor on the pretext of offering last minute settlement offers, challenging the eligibility of a resolution applicant or the constitution of the CoC also hinder the process of approval of a resolution plan.
These systemic, frequent delays in approving a resolution plan not only contribute to value erosion of the corporate debtor but also negatively impact commercial assessments taken by creditors and resolution applicants during negotiations.
While the Insolvency Law Committee has recommended fixing a 30-day period for approving or rejecting a resolution plan by the NCLT, prescriptive timelines for disposal of resolution plans do not sufficiently address the issue at hand.
The government should instead consider increasing the number of judges and building capacity for quicker disposal of cases. Instituting specialised benches and conducting effective training for NCLT members on the working of an economic legislation such as the IBC may go a long way in reducing delays and appeals. Mechanisms such as mediation may also be considered to resolve disputes and reduce litigation. Further, the government may review pre-packaged and fast-track insolvency resolution processes, as quicker alternatives to a CIRP.
Most importantly, the above changes need to be supplemented with a behavioural change in the stakeholders and adjudicating authorities to ensure that the IBC does not revert to its adversarial predecessors. Meticulous adherence to the events and timelines under the IBC coupled with judicial restraint on matters of commercial wisdom is crucial for a sustained solution. Moreover, the regulator should utilise its advocacy measures to encourage stakeholders to collectively operate within a framework of equity and fairness to preserve economic value with the oversight of the NCLTs.
For further information on this topic please contact Misha at Shardul Amarchand Mangaldas & Co by telephone (+91 11 4159 0700) or email ([email protected]). The Shardul Amarchand Mangaldas & Co website can be accessed at www.amsshardul.com.
