Image source - https://bit.ly/3o7WDJU

This article is written by Shivam Singhal, pursuing a Certificate course in Insolvency and Bankruptcy Code from LawSikho. The article has been edited by Priyanka Mangaraj (Associate, LawSikho) and Dipshi Swara (Senior Associate, LawSikho).

Introduction

The path for the establishment of the National Company Law Tribunal (hereinafter referred to as ‘NCLT’) didn’t turn out to be an easy walk as intended by the legislature. Provision for the establishment of such tribunals was incorporated through the Companies Amendment Act, 2002 of the erstwhile Companies Act, 1956. NCLT replaced the Company Law Board and was supposed to have have jurisdiction in matters related to the company and allied disputes. However, their establishment took a halt due to the impending litigation challenging the constitutionality of these tribunals. 

The Hon’ble Supreme Court settled the constitutionality of these NCLTs and through a notification published by the Central government on 1st June 2016 NCLTs were at last constituted. As per Section 408 of the Companies Act, 2013 which provides for the Constitution of National Company Law Tribunal states that:

 “The Central Government shall, by notification, constitute, with effect from such date as may be specified therein, a Tribunal to be known as the National Company Law Tribunal consisting of a President and such number of Judicial and Technical Members, as the Central Government may deem necessary, to be appointed by it by notification, to exercise and discharge such powers and functions as are, or maybe, conferred on it by or under this Act or any other law for the time being in force.”

At present NCLTs have been bestowed with jurisdiction in disputes related to companies under the Companies Act, 2013 like approving the scheme of arrangements, class action suits, share transfer restriction issues along with certain real estate matters in addition to the designated Adjudicatory Authority under Insolvency and Bankruptcy Code, 2016 (IBC /Code).

Rendezvous of NCLT and IBC

Indian courts have always been overburdened with a plethora of cases and the delay in adjudication is ever-increasing without any immediate recourse. NCLT is no exception to this particular headache. As mentioned NCLT is the adjudicating authority under IBC and the applications for the corporate insolvency resolution process are admitted to NCLT. These tribunals are one of the key pillars of the IBC as the decision on admission or rejection for the initiation of the corporate insolvency resolution process (CIRP) is taken by them.

Although the scheme of the IBC is a timely resolution which is currently 270 days for any resolution to be finalized. However, the reality is far from the timeline provided under the code. For instance, as per the official data posted by the Insolvency and Bankruptcy Board of India (IBBI) total of 4376 CIRPs have commenced by the end of March 2021. Of these, 2653 have been closed. Of the CIRPs closed, 617 have been closed on appeal or review or settled; 411 have been withdrawn; 1277 have ended in orders for liquidation and 348 have ended in approval of the resolution plan. An interesting detail about this data is that more than 86 % of the cases admitted have gone beyond the strict timeline prescribed under the code for the resolution. Further, the average time taken from the Insolvency commencement date to approval of the resolution plan by the adjudicating authorities is 433 days as against the 270 days statutory mandate.

Sticking to the statutory timeline was of umpteen importance and the adjudication process has always stayed behind the timeline. This delay creates further two evident problems: 

  1. Delays are hampering the objective of the code initially thought and was one of the key reforms as against its counterpart recovery laws and diminishing the value of the enterprise;
  2. Being economic legislation and technical nature of the matters it is further augmenting the encumbered pending cases status of these tribunals and having an adverse impact on efforts by banks and financial institutions to recover non-performing assets (NPAs).

With the filing of an application for initiation of CIRP being suspended for over a year due to a covid pandemic, the cases under IBC for resolution are expected to further increase. As per the information provided by the Ministry of Corporate Affairs out of 19,844 cases pending in NCLT 12,438 cases are under IBC. That’s roughly 63 percent of the total pending cases. Therefore a large chunk of these pending cases are under IBC and therefore reforms to put stop cork on ever-increasing is the need of the hour.

Necessary changes

NCLTs were touted as the change required for the swift adjudication of the cases with technical and judicial expertise. However, as mentioned already, reality is still far from the intended object. These delays can be attributed to multiple factors including infrastructural problems, nature of the cases involved especially multidisciplinary approach in the insolvency matters, usual delaying tactics by the professionals, fewer appointments and vacancies of officials and members and of the tribunals, etc. Let us look into certain issues and potential reforms which can deal with the surging problem of the increasing cases.

Infrastructural woes

NCLTs were initially established to adjudicate matters mentioned under company law legislation, but since the introduction of IBC in 2016 majority of the matters pertain to that. This added jurisdiction has increased the workload and the infrastructure is inadequate to deal with a high number of litigations. For a long time now RBI has been vocal on the need to ramp the infrastructure to deal with the increasing number of cases.

At present, there are sixteen benches of these tribunals including the Principal bench at New Delhi constituted by the Central Government. Although the government is trying to ramp up the infrastructure to deal with this problem as five benches of NCLT have been recently constituted in Jaipur, Cuttack, Kochi, Indore, and Amaravati along with the NCLAT bench at Chennai. The infrastructural upgrades must go on with the technological and human resource upgrades. As during the pandemic hit timeframe i.e. from 24th March 2020 to 31st March 2021, NCLTs was almost defunct for a longer duration compared to other courts due to non-availability of technical requirement and infrastructure. Whereas there is also a shortage of both judicial members and technical members. Since the nature of cases requires domain expertise, sufficient and regular appointments of the members and presently there are 39 NCLT members against the sanctioned strength of 63. Even the Supreme Court, understanding the gravity of the situation directed the central government to expedite the appointments of members to ensure faster adjudication.

insolvency

Moving beyond NCLTs ambit to ease off the burden

There are several initiatives that are taken in order to ease off the pressure of NCLT along with the dual intention of timely resolutions of companies under economic distress. RBI Prudential framework was notified in June 2019 and the Sashakt Asset Management Company are some of the frameworks devised to ensure resolutions are done without the interference of the NCLT. Although they have their own limitations. Unlike IBC where any company established can go or be taken up for resolution if a minimum default has occurred, RBI’s prudential framework for resolution of stressed assets is very limited. RBI-approved creditors which are mostly scheduled commercial banks or NBFCs can take part in this bank-led resolution process. If a similar system for a class of creditors other than RBI registered is made can ease off the pressure. 

On similar lines, Prepack Insolvency Resolution Process (PRIRP) was notified through an ordinance recently which is also a faster mode of resolution for MSME as compared to the CIRP process under the code. Although there is the involvement of NCLTs in PRIRPs however, the timeframe to resolve a distressed enterprise is lesser compared to CIRP and the involvement of the tribunals is limited. 

Conclusion

As India shares economic duress with the world, regulatory changes must be thoughtful, somewhat flexible, and reasonable. With the Covid pandemic worsening by hampering the adjudication process it can be assumed that the pendency of cases in NCLT will only increase. It would also be wrong to say that reforms are not taking place. The government is actively contemplating the issue of pendency of cases in these tribunals and certain measures have been taken up by the authorities like the Bank led resolution process or the lesser formal version like Prepack Insolvency mechanism for MSMEs or the creation of asset trading platforms which are similar to exchange will create a market for trading if distressed assets and easing off the burden. These changes along with other infrastructural changes can help reduce the deficit and ultimately uphold the objective of both the code and the tribunals.

References

  1. https://main.sci.gov.in/supremecourt/2020/16100/16100_2020_35_1501_24869_Judgement_27-Nov-2020.pdf
  2. https://prsindia.org/billtrack/the-insolvency-and-bankruptcy-code-amendment-ordinance-2020
  3. https://www.businesstoday.in/latest/economy-politics/story/200-insolvency-applications-filed-since-suspension-of-fresh-proceedings-ended-in-march-298864-2021-06-16
  4. https://indiankanoon.org/doc/170650810/
  5. https://www.vccircle.com/banks-weigh-sashakt-panel-proposed-fund-to-turn-around-stressed-assets/ 

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.

LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join:

https://t.me/joinchat/J_0YrBa4IBSHdpuTfQO_sA

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.

LEAVE A REPLY

Please enter your comment!
Please enter your name here