An analysis into the case for a Dedicated Tribunal for insolvency matters in India – By Saurav Singh & Kanishka Agrawal

An analysis into the case for a Dedicated Tribunal for insolvency matters in India

Saurav Singh & Kanishka Agrawal
5^th Year, B.A. LL.B (Hons.), Hidayatullah National Law University, Raipur

Introduction

On May 28, 2016, the Insolvency and Bankruptcy Code, 2016 was enacted, giving formal structure to India’s insolvency reforms. It quickly evolved into a reform by, of, and for the stakeholders involved. Seven years into the reforms, the results speak for themselves.

In a lot of ways, the Code and the underlying reform represented an exploration into uncharted terrain and a leap of faith. Many of the institutions needed to execute an advanced insolvency procedure did not exist. The legislation had to be written down; infrastructure had to be constructed; capacity had to be created; professions had to be developed; markets and practises had to grow; and stakeholders had to be made aware of the Code.

In this article, the focus is on the adjudicating authority as one of such key institutions on which the success of the IBC depends. An Adjudicating Authority working smoothly with sufficient infrastructure is crucial for the fulfilment of the objective of value maximisation of stressed assets and timely resolution as envisaged in the IBC. The NCLT’s performance has been satisfactory but recently it has been plagued with huge backlogs and excessive delays. Insolvency resolution for which time is of essence, this can prove to be fatal. Therefore, academia, judiciary and other professionals have lately started to discuss on the plausibility of a new dedicated tribunal for insolvency matters to resolve such issues. This proposition gained traction after a speech by Mrs. Nirmala Sitharaman, the Union Finance Minister where she talked of the difficulties faced by the NCLT and the deliberation over formation of new benches specifically for insolvency matters. This showcased the thought of the government towards making insolvency convenient for the ease of doing business. This gave birth to the serious deliberation, though nascent, for the need of a new tribunal separately for insolvency matters.

NCLT as the Adjudicating Authority for Corporate Insolvency

The constitution of the National Company Law Tribunal and the National Company Law Appellate Tribunal was no simple process. The idea of setting up a national tribunal was first suggested by the Justice Eradi Committee, 1999 where it was proposed that a tribunal could be established to examine laws related to insolvency and winding up of companies. Later, taking this recommendation into consideration, the Companies (Second Amendment) Act, 2002 inserted provisions for setting up of NCLT and NCLAT, the Act however was challenged and the structure of the tribunal was held unconstitutional. After making necessary amendments, improvised provisions were added in the Companies Act, 2013, which were again challenged, however, the issue was finally resolved when the Apex Court held that constitution of both the NCLT and the NCLAT is constitutionally valid. And thus, As per the provisions of Section 408 of the Companies Act, 2013, the National Company Law Tribunal came into force on 01 June, 2016.[1]

The main object of the Tribunal is to deal with disputes arising out of corporate matters, regulating and resolving them, and carrying out the necessary procedure in a time bound manner. However, its most important function is to govern matters related to insolvency and that’s where it is thoroughly scrutinized by the masses.

Ever since its establishment, the overall performance of the Tribunal can be considered as satisfactory but there are certain areas where it is certainly lacking. With the constant amendments to the Insolvency and Bankruptcy Code, 2016 new changes are introduced time and again in the functioning of NCLT and NCLAT. The whole procedure of resolution and liquidation of insolvent companies isn’t being carried out in a just manner which in turn has raised many questions and the shortcomings of the Tribunal are certainly in the limelight.

Reason for bestowing NCLT with the powers of AA in insolvency matters

The BLRC report made a case for a common dedicated Adjudicating Authority that would have jurisdiction over both corporate and individual insolvency. This was logical by economies of scale as well. However, unlike corporate insolvency and liquidation, the physical infrastructure of the adjudication institutions for individual insolvency need to be much more wide spread across the entire country to facilitate access to justice for the common Indian. The NCLT was not established by then and it did not have a wide spread presence across the country which was needed for the effective resolution of individual insolvency. In contrast to it, the system of Debt Recovery Tribunals was better established with a wide presence throughout the nation. Therefore, BLRC recommended for two separate tribunals for insolvency matters viz. DRTs for individual insolvency and NCLT for corporate insolvency.[2]

Problems with the NCLT- The case for a dedicated tribunal

It has been more than four years since the establishment of the National Company Law Tribunal. The Tribunal has 16 benches all over the country and with its affectivity in the field of corporate law, there will be additions in the coming years. However, despite its achievements, one must learn to recognize the flaws and highlight them as the Tribunal is far from reaching its true potential.

1. Extreme work load on the NCLT since inception: IBC mandates NCLT to be the only adjudicating authority in all corporate default matters. This leaves the NCLT with the onerous responsibility of resolving nearly 25,000 outstanding bankruptcy and insolvency cases, in addition to other company-related matters.[3] The Company Law Board (CLB) was abolished by Section 466(1) of the Company Act of 2013, and all ongoing CLB matters were transferred to the NCLT. Board of Industrial and Financial Reconstruction (“BIFR”) was similarly made defunct under the Sick Industrial Companies (Special Provisions) (SICA) Repeal Act, and around 700 ongoing cases in BIFR (as of 2015) were also transferred to the NCLT. The winding up and amalgamation cases which were around 5000 in number were transferred to NCLT. Added with an influx of new cases compounds to a major problem of coping with such huge caseload. For an estimate, there were about 41,000 cases pending before NCLTs in July 2022.[4] With an average annual disposal rate of 500 cases of the NCLT, it is impossible to complete the proceedings in a time bound manner.
2. Unsatisfactory performance in providing aid to the companies headed towards liquidation: One of the main purpose for the introduction of the Insolvency and Bankruptcy Code, 2016 was to provide an efficient resolution plan to a company which is insolvent and thus; help it overcome its liquidation. While it is true that it won’t be possible to resolve every such matter brought before the Tribunal, the object of the Code clearly states that a reasonable solution must be formulated to make it possible for majority of such companies. However, the figures are disappointing to say the least.[5] The introduction of NCLT was hailed as one of the most positive steps towards corporate insolvency, the tribunal was considered as a ground-breaking quasi-judicial body, but year after year, the annual results are nowhere near achieving any kind of positive outcome. Many insolvent companies are headed towards liquidation and the Tribunal is ineffective in providing any aid.
3. Delay in the Corporate Insolvency Resolution Process: There have been concerns regarding pendency and delays highlighted by the judiciary as well as recently by the 32^nd Report of Standing Committee on Finance.[6] As of 2022, a total of 12,918 cases under IBC were pending at different stages with assets worth Rs. 7.5 lakh crore blocked and 18 lakh crore transactions pending due to such cases. When the Code was first introduced, the provisions clearly stated that the cases would be resolved in around 180 days, with new amendments, 90 more days were added to ensure a fair decision making process, thus totalling the entire procedure to be completed in or before 270 days. Now, the number is at 330 days. Insolvency Resolution process is tedious, no doubt, but one of the main purpose for the introduction of tribunals was to dispose of cases in a time bound manner. Also, corporate insolvency isn’t a process which can be stalled for a longer period of time, the company which has exceeding liabilities is in no position to last long, thus making it extremely important to help them overcome their situation in the specified time limit. The Tribunal needs to take the matter more seriously as it isn’t beneficial for the companies to be heading towards liquidation despite having a solution right by their side.
4. Companies not being able to recover loan and creditors recovering money in such low numbers: It raises a serious concern when so many companies who could have had an effective resolution were being grossly sent for liquidation. This not only questions the decision making capacity of the Tribunal but also their competency with respect to dealing with such sensitive matters. As far as the final report is concerned, companies were left hanging dry, they were in no position to have a proper resolution or go through liquidation for that matter. Companies not being able to recover loan and creditors recovering money in such low numbers is another concerning issue which needs to be taken care of, the NCLT needs to adopt new approaches in order to resolve these recurring issues. [7]
5. Lack of proper infrastructure and adequate support staff: Currently, there are 16 benches of NCLT with an approved strength of 62 members of which there are a large number of vacancies. With the number of corporate insolvency cases arising day after day, the need for more benches has been staunchly proposed by experts and businessmen alike. Even the sanctioned strength of officers and support staffs has not been filled. Of the staffs available, majority are outsourced. Lack of staff when taken together with the poor infrastructure makes the situation even worse. Though the government has introduced additional benches, very few have been set up and those, which are in place are of hardly any use. Non-functional benches worsens the already existing burden. The effective functioning of additional benches should be an utmost priority of the Tribunal and stringent measures should be taken immediately to start their regular functioning, lack of adequate staff poses another serious concern which needs to be resolved, with proper training and timely evaluation it won’t be difficult to employ qualified and deserving people for the required posts.
6. Incompetent and untrained staff: The Bombay High Court in its judgement observed that remedial measures need to be taken as working and functioning of the National Company Law Tribunals(NCLT) requires to be litigant friendly and effective. It was also noted that Tribunals lack trained and competent staff to exercise judicial functions and same can be drawn from already functioning Courts.[8] The situation is grave because many important documents are handled on a day-to-day basis, be it documents to be produced before the bench or books of accounts showcasing the finances, it is to be noted that such handlings must only be done by people who are aware about the seriousness of the situation, as failure to do so can cause many additional issues which will be the sole liability of incompetent staff. The question of competence of the Members as well as the administrative staff could be met by forming a dedicated tribunal for insolvency matters. This is an important issue as the Bombay High Court has also noted and creation of a separate dedicated tribunal can fix it. The appointments in a dedicated tribunal will be of professionals and judicial members who are experts in the laws and resolution of insolvency. The administrative staff recruited to the tribunal can also be selected from a smaller pool of people who are acquainted specifically with the procedures of insolvency proceedings as opposed to the general recruitment in NCLT.

Furthermore, the court will be required to select qualified professionals (liquidators and administrators) to handle crucial administrative concerns such as asset and liability registration, collection and assessment, enterprise management, and so on. The availability of an experienced cadre of such experts with relevant commercial expertise is critical to the law’s successful implementation. Among other things, procedures will need to be put in place to guarantee that there is no conflict of interest between the designated professional and the parties involved in the proceedings.

7. Reduced burden on NCLTs: The NCLTs have the task of dealing with cases from the Companies Act, Competition Act and other related matters along with the IBC cases. The formation of a separate dedicated bench would allow the NCLT, a breathing space. The NCLT could efficiently deal with other matters if the burden of IBC is taken away as it is the insolvency cases which occupy the maximum time and workload of NCLTs.

Certain challenges in the creation of a new dedicated tribunal

The idea of a separate dedicated tribunal for insolvency matters, as fascinating as it may seem, has fundamental issues with implementation. The creation of a new tribunal replacing another tribunal which was formed not long ago seems counterintuitive and excessive. It can even result into aggravating the issues already plaguing NCLT rather than addressing them. Some of the concerns are discussed in this section.

1. Legislative changes and implementation problem: The creation of a separate dedicated tribunal would require comprehensive changes to be made in the IBC. The formation of IBC and NCLT have been born after nearly a decade of deliberations. The exercise of formation of a separate tribunal would undo the progress made and much would have to be started again. The cases would have to be heard again and the bench at the new tribunal would require time to get acquainted with the cases. This would require additional time. This is counter-intuitive to the purpose of the Tribunal to dispose of the cases in an expedited manner. This can prove fatal for companies undergoing insolvency proceeding and they might reach the stage from where liquidation is the only option. The uncertainty relating to the pending cases in NCLT would also have to be resolved and a mechanism for a smooth transfer of such cases will have to be put in place.
2. Infrastructural problem would persist, if not exasperated: The problem of unavailability of adequate infrastructure for the adjudicating authority does not seem to resolve by the creation of a separate tribunal but only aggravated. The physical infrastructure and resources including human resources needed to establish a new tribunal would be difficult to acquire. It will also take a significant time to build such infrastructure. This will hamper the prospects of a company to resolve its insolvency. Moreover, the problem of inadequate infrastructure cannot be solved by creating separate tribunals which would require even more infrastructure to begin functioning. The already limited and strained resources would have to be allocated to the new tribunal resulting in the inefficient working of both NCLT and the dedicated tribunal.
3. Transfer of cases and a turbulent transition phase: The problem that was faced by the NCLT in its initial days would plague the new tribunal also. It will work in a transitionary phase for significant period of time. This will annul all the progress made hereto as well as make the matters more complicated. The status of present insolvencies and the right forum where it would be adjudged will present difficulties for the companies and the various stakeholders. There will have to be framed specific rules for the issues arising out of this transitory phase.
4. Creation of awareness amongst stakeholders: The insolvency resolution process under IBC and NCLT itself are in a nascent stage. The awareness and education about them has not percolated sufficiently and it is considered as a niche domain of law, understood and practised by only a few people. To bring in a new tribunal would render all the efforts in the direction futile. The practitioners and various professionals were getting accustomed to the NCLT and its system. The formation of a new tribunal would pose a problem for them. A field of law with already less participants as advocates would be hindered by such experiment.

Suggestions

The challenges faced by NCLT require a resolution without any delay. The creation of a separate tribunal is a next generation reform for which sincere efforts should be made but it does not solve the problem at hand. It seems to be unfeasible in the near future due to the legislative and logical difficulties as highlighted above. The logical solution that the Government is also mulling over and has implemented to an extent is the establishment of new benches of the NCLT across the country. Even better could be if such new benches are dedicated solely for the matters of insolvency.  Some of the existing benches could also be designated for insolvency matters, especially in Mumbai and Delhi where more than 50% of the companies are registered.

Another mechanism could be allowing more classes of companies to be covered by the fast track resolution process. The pre-packaged insolvency resolution process is a laudable move by the Government in the right direction.

NCLT should also consider the large number of Interlocutory applications being filed by various stakeholders, often frivolous with a motive to delay CIRP, which require detailed judicial proceedings and adjudication, thus, exhausting the already scarce resources available to NCLTs. The provisions for high rate of fee and fine can be made for this.

NCLT can also reconsider about framing rules distinctly for IBC proceedings rather than following the NCLT Rules which were framed to suit the proceedings under Companies Act.

For meeting with the shortage of competent staffs and officers, schemes related to Research Associates and Research Assistants can be framed. Also, regular promotions regarding IBC should be done in Colleges for inspiring and attracting young professionals.

Digitisation and AI could also help in meeting with the backlog and timely resolution of insolvency matters.

Conclusion

In conclusion, the evolution and implementation of the Insolvency and Bankruptcy Code, 2016 in India, marked by the establishment of the National Company Law Tribunal as the adjudicating authority for corporate insolvency, have been pivotal steps towards fostering a robust framework for resolving financial distress. However, despite notable achievements, challenges persist, particularly concerning the overwhelming workload burdening the NCLT, unsatisfactory performance in aiding companies facing liquidation, and delays in the resolution process. The call for a dedicated tribunal for insolvency matters, while addressing certain shortcomings, presents its own set of complexities, including legislative changes, infrastructural inadequacies, and the need for skilled personnel.

References:

[1] Nikhil Shah and Kavya Ramanathan, The National Company Law Tribunal Readiness, Alvarez & Marsal India.

[2] Report of the Bankruptcy Law Reforms Committee. Volume-I. (2015).

[3] Fifth Report of the Insolvency Law Committee, (2022).

[4] Report of the Colloquium on Functioning and Strengthening of the IBC Ecosystem. IBBI. (2022).

[5] Ashu Vaishnav, NCLT and Its Shortcomings in Corporate Insolvency, 5 INDIAN J.L. & LEGAL RSCH. 1 (2023).

[6] 32^nd Report of the Standing Committee on Finance, 17^th Lok Sabha, Parliament of India. (2021).

[7] Prof. M.P. Ram Mohan and Prof. Balagopal Gopalakrishnan, Report of Study on Effectiveness of the resolution process under IBC: Firm Outcomes in the Post-IBC Period, Indian Institute of Management Ahmedabad. (2023).

[8] Kamal K. Singh v. Union of India, 2019 SCC OnLine Bom 5609.