Dhananjay Kumar and Hamraj Singh suggest ways to speed up insolvency resolution
The Insolvency and Bankruptcy Code, 2016 (IBC) emphasizes the importance of “time-bound” reorganization and resolution for distressed entities and it is touted as one of its defining features. The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP regulations) provide for a detailed milestone-based timeline for the process. The corporate insolvency resolution process (CIRP) is required to conclude within 180 days beginning from the insolvency commencement date and may be extended only once by the National Company Law Tribunal (NCLT) for up to 90 days. However, the 90-day extension has become a routine exercise in IBC cases.
According to data put out by the Insolvency and Bankruptcy Board of India (IBBI), out of the 94 cases in which resolution plans have been approved as of March 2019, around 72 have exceeded 270 days, of these 22 have exceeded 300 days, nine have exceeded 400 days, four have exceeded 500 days and three have exceeded 600 days. The 270-day period for completion of CIRP is very important for the stakeholders and investors and any delay needs to be addressed resolutely.
Further, the second level of delay has been in admitting cases, which has taken more than the 14 days as directed under the IBC. The delay in initiation and completion of the CIRP has proven detrimental to the interests of the stakeholders due to a loss in the valuation of the corporate debtor and driving away potential resolution applicant(s) or withdrawal of resolution plans in some cases.
The delay in admission and completion of the CIRP can be attributed to multiple reasons, each of which needs creative and constructive solutions. This article examines two such reasons and suggests solutions.
Delays due to litigation
A common refrain of the IBC process has been delays caused by litigation, which can come in the form of competing bidder litigation (so far, mostly on the basis of competing bids and qualification of competitors), claims-related litigation, inter-creditor litigation (mainly relating to distribution issues among financial creditors or between financial and operational creditors) and litigation arising out of previous management challenging the process.
While some litigation is inevitable and even desirable for a new law as it helps to fill legislative holes through judicial interpretations, some of these holes may have to be filled by legislative interventions. The amendment of the CIRP regulations to streamline section 29A, the Supreme Court judgments in ArcelorMittal India Private Limited v Satish Kumar Gupta on the rights of bidders to challenge the rejection of their proposal, and K Sashidhar v Indian Overseas Bank that re-established the paramountcy of commercial decisions of creditors in restructuring, and the role of NCLT during the approval of the resolution plan, can stonewall pesky litigation.
The IBC could be amended to clarify the applicable distribution waterfall during resolution (including entitlements of operational creditors) and certainty of the process followed during the CIRP. Another useful tool, in the context of claims-related litigation, can be the use of alternative dispute resolution methods such as mediation under the aegis of IBBI, failing which the NCLT can intervene.
The current process of inviting and evaluating resolution plans has acquired the colour of a tendering process, leaving more scope for players to litigate. Adopting pre-packaged resolution plans, or the Swiss challenge method or such other innovative bidding techniques may help curb some of the litigation arising from these issues.
Another factor contributing both to delays during admission and the CIRP is the massive workload that the NCLT and the National Company Law Appellate Tribunal (NCLAT) have been facing. However, this does not excuse delays in some cases where an inordinate amount of time has been taken to issue judgments even after the conclusion of arguments or in some cases, the order not being available for a long time despite the pronouncement in open court. The government is taking urgent remedial measures by hiring 32 new members for various benches of the NCLT and proposing to hire seven new members for the soon-to-be-set-up circuit benches of the NCLAT.
While these steps are laudable, more needs to be done in this regard. Strengthening of the NCLT physical infrastructure is equally critical. Amendment of the IBC or the rules to provide for electronic case management, notice and filing system would improve the efficiency of the court process. Information utilities have also not been fully operationalized as yet. Once these steps are taken, the admission process would be more streamlined as envisaged in the Bankruptcy Law Reforms Committee report.
The delays have already spooked some investors and fixing these issues have become an urgent need. Whether the IBC will be able to fulfil its promise or not hinges on the solutions to these issues.
Dhananjay Kumar is a partner and Hamraj Singh is an associate at Cyril Amarchand Mangaldas.