Improving The Functioning Of The National Company Law Tribunal – A Perspective

Update: 2023-05-31 10:00 GMT
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The National Company Law Tribunal (NCLT), established on 01 June 2016 under the Companies Act, 2013, is a premier tribunal in the commercial and economic field. Its primary litigants are financial sector entities and bodies corporate. The enactment of the Insolvency & Bankruptcy Code, 2016 (IBC) is often cited as one of the main drivers for India’s quantum jump from rank 142 in...

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The National Company Law Tribunal (NCLT), established on 01 June 2016 under the Companies Act, 2013, is a premier tribunal in the commercial and economic field. Its primary litigants are financial sector entities and bodies corporate. The enactment of the Insolvency & Bankruptcy Code, 2016 (IBC) is often cited as one of the main drivers for India’s quantum jump from rank 142 in 2014 to 62 in 2019 in the Ease of Doing Business Rankings, the most recent year for which data is available.[1] The rankings cover 190 world economies.

Having said that, there is still a general feeling of unease with reference to two issues – (i) the delay factor in disposal of applications by the NCLT, especially applications pertaining to admission of corporate debtors into the corporate insolvency resolution process (CIRP), and approval of resolution plans; and (ii) the so-called “rate of recovery” under the IBC. We may look at these issues one by one.

Delay in admission applications

One of the reasons for delays in admission applications is that while the IBC prescribes a time frame of fourteen days for admission, the time taken for admission by NCLT is way above this time frame. While NCLT is being pilloried for this, it is my personal experience that all stakeholders are to share the blame for this, not just the NCLT.

First, financial creditors do not disclose all existing documents along with their main application under section 7 of the Code. They instead wait for the reply from the corporate debtor before seeking time to file a rejoinder, annexing therewith new documents. At this stage, the NCLT has no other option but to allow an opportunity for the corporate debtor to respond to the new documents. Not doing so will violate the principle of natural justice.

Second, corporate debtors ask for adjournments to try and arrive at a settlement with the applying creditor. NCLTs are generally liberal in granting two or three or sometimes more chances to the corporate debtor to arrive at a settlement. There is a variation to this technique: the corporate debtor does arrive at a settlement, and gets the application withdrawn. Thereafter, the corporate debtor defaults after a few instalments, prompting the applying creditor to apply for revival of the application. For example, an application filed in, say, 2020, for initiating CIRP for admission gets withdrawn in 2021 based on the settlement agreement. Thereafter, due to default in complying with the settlement terms, the creditor once again applies to the NCLT, say, in 2022, for revival of the earlier application. If the application is allowed, then the original application filed in 2020 gets revived and becomes a pending application. This tends to distort statistics.

Third, the judgment of the Supreme Court in Dena Bank (now Bank of Baroda) v C. Shivakumar Reddy,[2] has been misused both by creditors and debtors to file documents in instalments, thus leading to avoidable delays. The creditors also wait for the Corporate Debtor to take a stand through the reply to the application, before asking the NCLT to file a rejoinder. The rejoinder is usually accompanied by new documents which were already in the possession of the creditor prior to the filing of the application itself. This renders the principle of discovery of documents nugatory. Presenting new documents at the rejoinder stage requires the NCLT to give a chance to the Corporate Debtor to have its say on such documents, thus leading to further delays which are totally unnecessary.

Delays in approving resolution plans

This is another area where the NCLT has got brickbats from almost all stakeholders. In fact, in Ebix Singapore Pvt Ltd v Committee of Creditors of Educomp Solutions Ltd & another,[3] Justice DY Chandrachud (as he then was) had remarked that “Judicial delay was one of the major reasons for the failure of the insolvency regime that was in effect prior to IBC. We cannot let the present insolvency regime meet the same fate.”

The misuse of section 60(5)(c) of the IBC is the single biggest culprit in this regard. While various Supreme Court judgments circumscribe the limits of the NCLT’s power while dealing with resolution plans, litigants of all hues file applications to invoke the residuary powers of the Adjudicating Authority seeking intervention in areas that were never conceived of. Similarly, while there are innumerable Apex Court judgments that lay down that proceedings under the IBC are not adversarial in nature, it is gradually being pushed in that direction by various groups of stakeholders.

No doubt, any litigant has the right to legal remedies to ventilate his grievances and seek appropriate reliefs, but this has now reached a stage where even the first principles of the IBC that it is inherently not adversarial in nature, as has been elaborated in a catena of Supreme Court judgments, are being challenged on the flimsiest of pretexts. This is a gross misuse of the system and needs to be curbed. But for this, every stakeholder must take responsibility. In such circumstances, it is but inevitable that there will be value erosion of the corporate debtor.

Rate of recovery

When it comes to recovery, the IBC and its ecosystem has been castigated for its “poor” rate of recovery, and the consequent “loss” to the Exchequer. This is because the stakeholders use the total amount claimed by the creditor as a reference point versus the amount provided for in the recovery plan. This is often not realistic, because the amount claimed includes the interest and, in the case of financial creditors, penal interest also. As per RBI’s circular,[4] income from non-performing assets (NPAs) is not recognised on accrual basis but is booked as income only when it is actually received. If an account turns NPA, banks should reverse the interest already charged and not collected by debiting the profit and loss account, and stop further application of interest, though they may continue to record such accrued interest in a separate memorandum account. Even while computing gross advances, the interest in the memorandum account is not taken into consideration. In the case of settlements before admission, the entire amount claimed by the creditor is cited as the amount recovered.

Some suggestions

Ideally, one should calculate the “recoveries” effected under the IBC, as a ratio of the principal. This would present a better picture of “recoveries,” for want of a better term, since the IBC is not supposed to be a recovery mechanism. Take the case of Videocon. The total admitted claim as on the insolvency commencement date was in the region of around Rs.64,000 crore. This claim is inclusive of interest. As against this, the resolution plan proposed by Twin Star, the Successful Resolution Applicant, provided for payment of Rs.2,962 crore, representing 4.15% of the total outstanding claim. There was much criticism when the NCLT approved the resolution plan. Even the website of the NCLT states that out of 25,225 applications under section 7, 9 and 10 disposed of between 01 Nov 2017 and 31 August 2022, including those withdrawn under section 12A, the total amount involved was Rs.10,49,264/-.[5] These figures are cumulatively taken from the respective applications and consolidated, thus including the interest component.

NCLT should actively disapprove and discourage the practice of parties to withhold relevant documents, by suitable orders imposing exemplary costs on the erring party. This will go a long way in curtailing delays.

Standardisation of orders through a defined architecture and module will reduce the time taken by the NCLT in pronouncing orders, eliminate redundancy and help data analysis. This is not to say that orders should be reduced to drab affairs, devoid of any creativity. But all the essential facts that should find a place in the order can be standardised, greatly reducing the time taken by the NCLT Members and their support staff in preparing the orders. The judicial authority concerned will still have to dictate or prepare the judicial reasoning part, no more and no less. This will achieve two things – conformity in contents of the orders; and lesser workload on the NCLT, allowing them to concentrate on weightier matters.

Once the decision is taken by the NCLT for admission of applications under section 7, 9 or 10, the basic facts as well as the operative portion of the order can be standardised. Similar is the case in applications for approval of resolution plans. The other applications for confirmation of RP, order for liquidation of the Corporate Debtor, and order for dissolution of the Corporate Debtor. The first stage order calling for the report of the resolution professional in the case of applications under section 94 and 95 of the IBC can also be completely standardised. In the case of applications or petitions under Companies Act, 2013, the restructuring orders under sections 230-232, 252, 66 etc. can be fully standardised. Such moves can free up the time of the NCLT to deal with applications where judicial time is required to be concentrated. Eventually, the NCLT can and should move towards appropriate ISO certifications.

Periodical workshops can also be organised by the IBBI with other stakeholders such as financial creditors and RPs, where members of the NCLT can be requested to address on the practical problems. This will lead to capacity building for the RPs also.

The author is a former Judicial member of NCLT, Kolkata. Views are personal.

[2] (2021) 10 SCC 330 decided on 04 August 2021

[3] (2022) 2 SCC 401 decided on 13 September 2021

[4] dated 01 July 2014, last accessed on 25 March 2023.


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