NCLAT ruling weakens Insolvency and Bankruptcy Code, say experts

NCLAT says the 14-day timeline for rejecting or admitting a case under Insolvency and Bankruptcy Code a directive, meaning courts do not have to necessarily adhere to it


The NCLAT ruling also adds to the uncertainty facing new investors willing to buy distressed assets. Photo: iStock
The NCLAT ruling also adds to the uncertainty facing new investors willing to buy distressed assets. Photo: iStock

A recent National Company Law Appellate Tribunal (NCLAT) ruling on the Insolvency and Bankruptcy Code (IBC) weakens the mechanism by delaying quick resolution, legal experts said.

The appellate tribunal said that the 14-day timeline for rejecting or admitting a case under the IBC was a directive: that means courts do not have to necessarily adhere to this deadline. It, however, said that once a case is admitted, the 270-day timeline for resolution is mandatory.

Time-bound resolution is a cornerstone of the IBC. It is critical, especially at a time when the government has empowered the Reserve Bank of India to ask banks to invoke the IBC to solve the Rs9.6 trillion stressed assets problem.

To admit or reject a petition “is procedural in nature, a tool of aid in expeditious dispensation of justice and is directory,” said the order passed by justice S.J. Mukhopadhaya on 1 May in a case related to JK Jute Ltd.

The NCLAT ruled on this issue after different benches of the National Company Law Tribunal (NCLT) passed conflicting orders. The Mumbai and Hyderabad benches ruled that even admission or rejection was time-bound and Allahabad ruled that there was flexibility on admission and rejection of a plea.

The NCLAT said that while ruling on whether or not an application of insolvency of a company is admissible, the tribunal is performing a judicial role and the sections of the Companies Act 2013 do not prescribe a timeline for NCLT to pass orders.

The NCLAT order “has also diluted the timeline for resolution of cases of insolvency and bankruptcy to a certain extent”, said Tine Abraham, counsel, Trilegal.

However, “we have to be open to the reality that the admission or rejection of plea within 14 days may not be possible in all the cases, as sometimes certain extraneous factors such as case load or procedural requirements could delay the processes,” said Abraham.

The IBC was supposed to be the answer to the fragmented legal framework for stressed assets that has been delivering poor outcomes for years to creditors and distressed businesses seeking an exit.

“The timeline of the code was the essence and strongest pillar of the code. If that is not maintained, then the efficacy of the code is weakened,” said Sapan Gupta, national practice head-banking and finance at Shardul Amarchand Mangaldas, a legal firm.

The ruling also adds to the uncertainty facing new investors willing to buy distressed assets.

“On the one hand the decision is reassuring since NCLAT has reiterated that ‘time is of the essence’ in insolvencies. On the other, it renders the timelines for admission or rejection as a directive. This is puzzling for new investors who are aware of the poor past record,” said Anurag Das, managing partner of Rain Tree Capital, a Singapore-based investment manager specializing in Asia-Pacific credit, and distressed and special situations.

A 6 April study by National Institute of Public Finance and Policy, New Delhi said the new specialized tribunal (and its benches) had a disposal rate of 6,620 cases annually. Based on these numbers, the report said the NCLT would accumulate a backlog of 130,250 cases in five years. A mandatory timeline could have ensured a quicker disposal. To make the IBC proceedings more efficient, the current processes do not accord opportunity to debtors to argue against insolvency proceedings.

“A mandatory timeline is being deemed prejudicial to certain involved parties. One could argue that any delay at the NCLT or NCLAT levels is prejudicial to society at large. The entry of new investors with expertise is critical for good resolution results, a lasting fix to the NPA (non-performing asset) problem, and for high GDP growth,” said Das.

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