NCLT guidelines: Govt’s bold steps to expedite resolution of IBC cases

Corporate affairs ministry is spearheading a strategic overhaul of the NCLT guidelines to expedite IBC cases.

The ministry of corporate affairs is in the process of revising guidelines for the National Company Law Tribunal as it looks to expedite resolution for companies dealing with impending insolvency cases. A key focus of the government’s draft proposal is to streamline the corporate insolvency process by emphasising that once creditors establish a company’s default, NCLT benches should not engage in questioning the default, especially in the context of financial creditors.

Despite the initial eulogisation of the Insolvency and Bankruptcy Code (IBC) as a groundbreaking solution for insolvency challenges, persistent delays have hindered its effectiveness in resolution processes. The Standing Committee on Finance previously highlighted two primary stages where delays most frequently occur within the Corporate Insolvency Resolution Process (CIRP): the admission of applications to initiate CIRP and the approval of resolution plans by NCLT.

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Delays at NCLT’s end

To address the first issue, the MCA proposes that NCLT should abstain from scrutinising and admitting challenging petitions once a creditor has established a default, as such actions tend to only prolong the process. The MCA asserts that while matters related to company law may warrant extended proceedings to consider the principles of natural justice and accommodate all parties involved, the same logic should not be applied to proceedings under the Insolvency and Bankruptcy Code.

This is not the first instance of the MCA attempting to overhaul the IBC resolution process. In January of this year, the ministry introduced a list of approximately 30 changes to the Insolvency and Bankruptcy Code, which included the introduction of the long-awaited out-of-court pre-pack for all companies and a comprehensive framework for group insolvency.

The Insolvency and Bankruptcy Code, launched in 2016, aimed to create a unified framework governing insolvency and bankruptcy proceedings across companies, partnership firms, and individuals. However, NCLT operated before the IBC’s inception, following rules established for company law matters. Recognizing the need for IBC-specific guidelines, starting with the admission stage, the government seeks to significantly reduce delays at the adjudicating authority level.

While the IBC stipulates a 14-day timeframe for deciding on the admission of an application, executing this rule has proven to be one of the main obstacles in insolvency proceedings. In practice, the adjudicating authority, NCLT, often takes up to a year or more due to its tendency to question and admit litigations against the initiation of the process. Legal firms have expressed reservations about this, arguing that once a creditor proves the corporate debtor’s default, admission into insolvency is imperative.

What’s causing delays in IBC cases?

Latest available data reveals that it took an average of 560 days to resolve 143 cases in 2021-22, with an average time of 468 days for resolving 120 cases in 2020-21.

Delays in IBC resolutions lead to further erosion of a company’s value over time, resulting in reduced creditor recovery. In some instances, creditors have been forced to accept significant reductions in the amount owed, often up to 90%. To enhance efficiency, the government must enact measures to expedite resolution timelines within insolvency and bankruptcy courts.

Apart from delayed case admissions and resolution plans, other issues are also hampering the current IBC regime, potentially leading to diminished creditor recoveries. These problems encompass a shortage of judges in bankruptcy courts, disagreements between lenders and potential buyers over company valuation, and more.

For instance, in the case of Reliance Capital’s resolution, lenders are dissatisfied with the valuation as it falls short of their expectations. Consequently, a second auction has been authorized to maximize asset value. In December 2021, Reliance Capital initiated the corporate insolvency resolution procedure (CIRP) under the IBC. Other high-profile IBC cases that encountered similar delays include DHFL and Srei.

The industry has been advocating for a single-window clearance system for companies undergoing IBC resolution, encompassing various processes under Company Law. These processes involve changes in a company’s board of directors, promoters, share capital, and addressing noncompliance-related issues.

Furthermore, the government should prioritize filling vacancies within NCLT benches, as these tribunals are also grappling with shortages of support staff, including assistant registrars. Without such efforts, NCLTs nationwide will struggle to operate at their optimal capacity.