Institution in Focus: Insolvency tribunals under the Insolvency and Bankruptcy Code

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[Ms. Gausia Shaikh is Legal Consultant (India) at REDD Intelligence Asia, a Singapore-based news and analysis firm, and a member of the CIFL Board of Advisors. This blog piece is a part of the series which features contributions by the members of our Board of Advisors.]

(A modified version of this blog was first published on the REDD Intelligence website)

In the past few years of observing the operationalization of India’s Insolvency and Bankruptcy Code, 2016 (“IBC”), a rather disappointing picture of the performance of the judiciary at the National Company Law Tribunals (“NCLTs”) and National Company Law Appellate Tribunal (“NCLAT”) is painted. The tribunals have faced criticism for delays, inconsistent orders, and for not having enough capacity to deal with the number of IBC cases pending before them, often being blamed for being at the core of most of the issues in the working of the law itself. A clearer picture of whether the above allegations hold substance was found last year with the release of the report of the Standing Committee on Finance. Among other things, the report pointed out that not only was the NCLT working at just about 54% of its full capacity, but in terms of workload, while IBC accounts for 42.3% of cases before it, company law cases constituted the rest.

With limited resources and a large caseload outside the IBC, it is not surprising that according to the committee report, 71.3% IBC cases had been ongoing before the NCLTs for more than 180 days as of 31 May, 2021. When the law was first introduced, corporate insolvency resolution processes (“CIRPs”) were to be completed within a period of 180 days, extendable up to 270 days with the NCLT’s permission. While the period for completion of CIRP has increased to a total of 330 days, the first milestone in the restructuring process remains 180 days. More than 70% of cases exceeding this initial milestone do not bode well for the tribunal’s attempts to battle delays. That said, there is only so much that the tribunal can do with the cards it was dealt. Moreover, what is often forgotten in the frequent bouts of criticism received by the tribunals, are the instances when the tribunals have in fact acted proactively and conducted comprehensive research on global practices to fill gaps in the IBC left by the lawmakers. Two such landmark instances relate to group insolvencies and cross-border insolvencies under the IBC mechanism. 

India saw its first example of group insolvency proceedings in the insolvency of 13 companies belonging to the Videocon Group in 2019. With no comprehensive legal framework governing such insolvencies, the Mumbai Bench of the NCLT was compelled to study and apply globally accepted principles for the consolidation of proceedings for multiple companies belonging to the same group. Following such principles, the NCLT was able to lay down the basic criteria which it followed to ascertain whether a consolidation of assets and liabilities could be permitted for the insolvency proceedings of these companies. The NCLT’s decision, while helpful, cannot be considered general law, and was based on the unique facts of the case. Therefore, until a legal framework is put in place by lawmakers, all cases of group insolvency will continue to be adjudicated on a case-by-case basis. The uncertainty and unpredictability in such instances – despite the NCLT doing its best to provide at least a conceptual clarity on how to deal with them – can only be resolved once lawmakers act.

On the cross-border insolvency front, the case of Jet Airways (India) Limited forced the NCLAT to adopt the globally accepted practice of cross-border insolvency agreements (also known as protocols) when concurrent Dutch and Indian insolvency proceedings were ongoing against the company. To ensure value maximization, the NCLAT directed the Indian insolvency professional and the Dutch administrator to enter into a cooperation agreement. Today, the Jet Protocol is not only an important document in India’s insolvency law history, but also a unique example of voluntary cooperation among jurisdictions, prompted by insolvency tribunals and officials. It will always be remembered as a key step in the resolution of India’s homegrown airline under the IBC.

While orders like Videocon and Jet fill the legislative vacuum, judges are treading on thin ice when choosing to pass them. They must be very careful to not leave an issue which has come before them unresolved, while also ensuring that they do not exceed adjudicatory powers available to them under the law, especially when the law is silent on these issues. The Indian Constitution does not permit the judiciary to act beyond the scope of the law from which they gain their power to adjudicate upon issues arising under such law. Consequently, such orders are vulnerable to challenge. Therefore, it is essential for lawmakers to ensure that some legal framework is put in place to enable the judiciary to confidently decide on matters concerning such insolvencies with certainty and predictability of process and outcome, doing away with the case-by-case approach used so far. 

It appears that absence of legislative direction and inadequate capacity at the tribunals may be considered largely responsible for the tribunals being unable to reach optimal performance when enforcing the law. Not to mention the radical change in the conventional role of the judiciary introduced by the IBC, which requires some level of training and conditioning of the tribunal members when dealing with cases under the law.

Prior to the introduction of the IBC, the courts oversaw judicial and commercial decisions, and even decided on the fairness of the terms in restructuring and winding-up proceedings. In came the IBC and asked the judiciary to limit its decision-making powers to a supervisory role under an economic legislation which relied on the experience of creditors to make the right commercial decisions for the companies under restructuring. Such a drastic change in roles might have also led to enforcement teething troubles by the judiciary.

In view of the above, while there is clearly a problem in the enforcement of the law to its optimal level, it is capable of being fixed with some focused attempts at capacity building, training and caseload management at the NCLT. The ministries and lawmakers have a portion of their preliminary work completed in the 2021 report of the Standing Committee on Finance. The committee has recommended that as a first step, the NCLT should recruit and make plans that take into consideration the capacity requirements of the next three to four years. The committee has also expressed the desire for constituting dedicated NCLTs that would solely deal with IBC cases, because such cases directly impact the economy and are essential for maintaining the health of the financial sector. This calls for focused attention of the tribunal on IBC cases.

As is evident from the above, the data is out, NCLT performance has been studied, and a committee of experts has made recommendations that could facilitate capacity building and caseload management at the tribunals. It is now for the lawmakers to fill some gaps in the law and facilitate its optimal enforcement.

That said, as the proverb goes, “well begun is half done”.  

The views expressed in this article are those of the author and in no way do they reflect the opinion of the Centre for Insolvency and Financial Laws or any of its Board of Advisors.

One Comment

  1. Good read

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