How India's bankruptcy code framework is undergoing a quiet makeover

On Wednesday, in a matter involving Finolex Cable, the Supreme Court used strong words while speaking about the National Company Law Tribunal and the National Company Law Appellate Tribunal — words such as “rot” and “unbecoming”.

The NCLT and NCLAT are quasi-judicial bod­ies established in June 2016 to adjudicate issues relating to Indian companies. Insolvency and Bankruptcy Code (IBC) experts say if the Supreme Court found NCLT and NCLAT mem­bers in contempt, it could set judicial precedents affecting IBC decisions.

“This might impact the credibility of the NCLAT and the trust stakeholders place in the insolvency resolution process. Such a ruling could also lead to delays in ongoing insolvency cases, prompt reviews or amendments to the IBC, and influence strategies of companies and creditors involved in insolvency proceedings,” says Sonam Chandwani, managing partner at KS Legal & Associates.
 

Legal experts also point out that the IBC has been undergoing a quiet transformation.

In January, the Ministry of Corporate Affairs (MCA) floated a discussion paper on an overhaul of the code with 30 amendments. The IBC Amendment Bill, which aimed for a complete overhaul, went through months of inter-ministerial consultations. However, it has yet to be tabled in Parliament. Business Standard has learnt that consensus at the highest levels in the government has been elusive.

This, though, has not come in the way of the Insolvency and Bankruptcy Board of India (IBBI) making the code clearer and more efficient. Take for instance the performance of the NCLT, which deals with the IBC and companies as well as with competition law matters. The tribunal expects to have successful resolutions of 300 cases this financial year, compared to 180 in FY23.

“One reason (for this) could be the intuitive approach in ef­fectuating critical improvem­en­ts to the insolvency regime. The constant alignment to meet gro­und-level realities is certainly a factor,” says Krithika Jaganathan, associate partner, Lakshmikumaran & Sridharan Attorneys.

Through multiple amendm­ents following stakeholder cons­u­ltations, the IBBI has given more powers to those involved in the Corporate Insolvency Resolution Process (CIRP), be it the resolution professional, the committee of creditors (CoC), or representatives of a class of creditors such as homebuyers. The MCA has mana­ged to fill most of the vacant positions in the NCLT — 57 of the 63 sanctioned posts are taken, compared to 43 two years ago  providing more capacity to deal with the increasing cases.

De-clogging NCLT

As recently as last month, the IBBI proposed a slew of amendments to the IBC regulations to rationalise and harmonise the timelines during CIRP and to seek in­formation and cooperation from the stressed company. The IBC regulator also authorised the CoC to call for an audit during the CIRP.

In another move, one that will help homebuyers, the authorised representative (AR) of a class of creditors were also given a greater role in the insolvency proc­ess by the IBBI. The AR, for instance, must assist homebuyers in understanding the discussions and considerations at the CoC. To streamline processes, the IBBI also made it essential that dates and details related to debt, default and limitation be included in claim forms.

“The intent and expectation are that these cha­nges will give more clarity in processes to the RP and may help de-clog the NCLT with less litigat­ion on claims and limit­ation,” says Shiv­ani Sin­ha, partn­er, Lut­hra and Lu­thra Law Offices.

The IBBI, in or­der to reduce the number of applications for delayed claims and help NCLT co­ncentrate on more pressing ma­tters, incre­ased the timeline for creditors to file their claims till the date of issue of request for resolution plans or 90 days from the insolvency commencement date, whichever is later.

“There is no denying that these amendments are positive steps in the direction of making insolvency resolution proce­sses quicker, more effective and transparent,” says Kumar Sau­r­abh Singh, partner, Khaitan & Co.

A senior government official said that given all the amendments to regulations, there is no urgent need for the IBC Bill, except to tackle some of the larger policy issues. “The efficiency of the code has been improved through a host of measures. The IBBI has been able to address these issues without a legislative change to the code,” the official said.

The insolvency regulator has in fact sought public comments on all the regulations it has notified under the code. Calling the exercise a “crowdsourcing of ideas”, the IBBI has given a window of eight months ending December 31 to all stakeholders to share their views.

 

A Bill in waiting

Some of the changes to the code, which require further discussion, are to do with cross-border insolvency, group insolvency, and the fast-track mechanism, say people in the know who cannot be named.

On cross-border insolvency, there are concerns that it would prolong the pendency of the ongoing cases. Besides, officials say, the model United Nations Commission on International Trade Law tends to favour developed countries.

“The January paper consid­ers at length the changes in relation to the admission of CIRP applications, streamlining the insolvency resolution process, recasting the liquidation process, and the role of service providers under the code,” says Abdullah Qureshi, associate partner, IndiaLaw LLP.

The draft proposal to amend the IBC has so­ught more technology, transparency, and speed. It gives more power to the adjudica­ting auth­ority (AA), allows mandatory admission of insolvency applications filed by financial creditors, seeks specialised framework for real estate to provide relief allottees, and looks at expanding the scope of pre-packaged insolvency sch­e­mes beyond micro, small and medium enterprises.

To discourage frivolous or vexatious applic­ations, the draft proposal looks to give AAs the power to impose penalties. The minimum pena­l­ty is proposed to be ~1 lakh per day or three ti­m­­es the loss caused or unlawful gain, whichever is higher. Section 29A of the Code may also be a­­m­ended to allow AAs to bar a promoter who has committed repeated or substantial contraventions.

IBC and company law practitioners have raised the issue of domain expertise among NCLT members as one of the challenges, though the increase in strength is great news. The ministry is trying to frame a set of guidelines for the AA to deal with IBC cases for faster processes.

Meanwhile, the Supreme Court’s rap in the Finolex Cable case has stirred things up.