The Ministry of Corporate Affairs in January 2023 posted a long list of changes recommended for the Insolvency and Bankruptcy Code (IBC) to revamp the existing structure of the corporate insolvency resolution process (CIRP), aiming to enhance and strengthen the current provisions and mechanisms pertaining to admitting CIRP applications, streamlining their resolution, and re-moulding the role of service providers under the IBC.[i] The wide range of proposed changes, currently offered to the general public for comments, include the restructuring of the CIRP to permit the financial creditors approaching under the IBC to choose the initiation of CIRP against the corporate debtor exclusive of judicial intervention.
Statistics on time-based insolvency resolution under IBC
As per reports in October 2022, an empirical analysis of the 3400 cases entertained under the IBC since its inception shows that more than half of the insolvency proceedings ended in liquidation, while only 14% of the total cases had proper resolutions in consonance with the intention behind initiating CIRP. While the IBC has seen liquidation orders being issued against 1807 companies, the National Company Law Tribunals (NCLTs) have approved the resolution plans for 553 entities.[ii] Although operational creditors submitted 3008 insolvency resolution applications in comparison to 2531 cases filed by financial creditors, at least 33% of the financial creditors had their dues realised through the CIRP, in comparison to a mere 16.5% of operational creditors as per the Reserve Bank of India (RBI). However, two-thirds of financial creditors still had to endure a “haircut” on loan recoveries sought through the IBC, bearing the brunt of prolonged insolvency proceedings.[iii]
There has also been an uptick in the average time period taken for completing the CIRP, with companies having dues greater than ₹1000 crore undergoing CIRP for more than 2 years. As of June 2022, 61% of CIRP applications filed had been ongoing for more than 270 days.[iv] The main reasons blamed for this delayed resolution from the administrative side pertain to infrastructural inadequacies, including the shortage of manpower with the 16 benches of the National Company Law Tribunal (NCLT), as well as the unforeseen disruptions in general operations caused by the COVID-19 pandemic. While this may be true, the contributory role of applicants towards this delay, in the form of requesting extensions leading to unnecessary adjournments or deliberately stretching the time for proving the existence of a default, cannot be ignored.[v]
Such lacklustre statistics for IBC implementation are also considered to flow from inordinate delays caused by unnecessarily overstretched litigations and bottlenecks faced by the adjudicating system. In addition, considering that 34% of the cases entertained by the NCLT were transferred from the now-defunct Board of Industrial and Financial Reconstruction (BIFR), the burdening of the NCLT benches with old cases redirects their focus from entertaining fresher CIRP applications under the IBC.[vi] This has long called for urgent revisions to the IBC provisions to account for shorter timelines, not only to resurrect the “insolvency ecosystem” but also to prevent value erosion by the time the cases are resolved.
MCA Recommendations floated in January 2023
In their suggestions for admitting applications for initiating CIRP, the Ministry prescribes the need for amending Section 215 of the IBC, requiring operational creditors to submit satisfactory evidence of default committed by the corporate debtor similar to the condition mentioned for financial creditors, intended to save the time of the Adjudicating Authority (AA) in determining the actual occurrence and extent of the alleged default. In addition, the corporate debtor is to be provided with a stipulated time period to respond to the financial information raised in the CIRP application, failing which the AA would be authorised to assume the occurrence of the default and initiate the CIRP proceedings accordingly.
In addition to the above, the Ministry stipulates the legislative intent behind admitting a CIRP application under Section 7 of the IBC as creating a bar on engaging in investigations into factors such as the financial strength and solvency of the corporate debtor before admittance. In other words, if the default is satisfactorily established by the evidence presented, the AA ought to accept applications with no discretion in terms of launching investigations into the case background for any additional confirmations. As referenced by the Ministry, this goes against the recent Supreme Court decision in Vidarbha Industries Power Ltd. v. Axis Bank Ltd., which interpreted the term “may” in Section 7(5) of the IBC to give freedom to the AA for admitting or rejecting a CIRP application even if the existence of a default by the debtor had been proved. This also lays the foundation for reducing the timeline for the AA’s admission or rejection of the CIRP application within the 14 days earlier meant for ascertaining the existence of a default by the debtor.
Another aspect of recommendations by the Ministry reducing the participation of the AA involves redesigning the existing Fast-Track Corporate Insolvency Resolution Process (FIRP) to provide financial creditors with the option to choose an informal out-of-court process for drafting their resolution plan, and involve the AA only at the stage of final approval for the resolution plans, or a moratorium as required. On the other hand, the AA is suggested to possess the requisite discretion to determine both the reinstating of a CIRP process as compared to the liquidation of the corporate debtor, as well as determining whether a corporate debtor can be dissolved without undergoing any liquidation process.
Viability of the MCA recommendations
The recommendations floated by the MCA attempt to showcase the intent of the Indian Government to reduce the time taken by the NCLT to admit CIRP applications by limiting its discretionary powers and putting explicit guidelines with negligible space to move in order to bring the timeline for initiating insolvency cases to a minimum. While the Ministry may be well-intentioned in recommending to shift the onus of proving the default on the parties approaching the NCLT simply for achieving the objective of faster case resolution, the liberty for the Tribunal to spend additional time to determine the existence of the default is substantially hampered which may ultimately give rise to newer issues plaguing the same objective. This strategic manipulation of the independence of the NCLT by the Ministry being apparently compensated out by other ancillary discretionary powers may lead to working against one of the very objectives behind the MCA recommendations – to filter out frivolous or vexatious complaints without the NCLT wasting considerable resources on such matters.
This may also be comparable to the methodology adopted for filing complaints before the Competition Commission of India (CCI), wherein the “informants” are required to bring all the relevant information along with their complaint to substantiate their claim of competition law being violated. However, the line of difference arises in the freedom granted to the CCI to call for additional research on the subject matter of the complaint submitted by the informant, while the suggested direction by the Ministry for the NCLT is to consider the evidence for the commission of default submitted as wholesome for admitting the application without any further substantiating, unless for genuine reasons the NCLT was justified to ask for additional evidence. This recommendation of the NCLT not being permitted to examine the evidence or conduct their own investigations on the submitted application, albeit from the perspective of reducing the CIRP resolution time, may be interpreted as the Legislature snatching away the liberty with which the NCLT can operate, to make their own determination on admitting CIRP applications.
Therefore, to create an administrative balance with the interpretative guidelines postulated by the Indian Supreme Court, the NCLT is better suited if it keeps its power to adjudicate on the existence of a default in spite of the evidence being provided by the parties. This effectively clears out the possibility of any false or malicious evidence of a non-existent default permeating through the thick wall of the Information Utilities (IUs) primarily entertaining and scrutinising such evidence, possibly presented by the creditors simply to protect their interests and which would adversely affect the impugned corporate debtor. Similar to the powers granted to the CCI, the NCLT should still possess the authority to conduct an additional investigation into the veracity of the evidence submitted, which would help in screening through applications before they are initiated into full-fledged insolvency resolution processes, ultimately saving the NCLT from having to simultaneously adjudicate on multiple cases with limited manpower entailing insufficient scrutiny of the evidence presented against corporate debtors.
[i] Notice – Invitation of comments from the public on changes being considered to the Insolvency and Bankruptcy Code, 2016, Ministry of Corporate Affairs (Jan. 18, 2023), https://www.mca.gov.in/content/dam/mca/pdf/IBC-2016-20230118.pdf.
[ii] Diksha Munjal, Explained | The Insolvency and Bankruptcy Code (IBC) – where does it stand today?, The Hindu (Oct. 6, 2022, 1:23 PM), https://www.thehindu.com/news/national/explained-what-is-the-insolvency-and-bankruptcy-code-ibc-and-where-does-it-stand-after-more-than-five-years-of-being-in-place/article65969421.ece.
[iii] Shashank Didmishe, Financial creditors take 67% haircut in IBC cases, Financial Express (Dec. 31, 2022, 1:20 AM), https://www.financialexpress.com/industry/financial-creditors-take-67-haircut-in-ibc-cases/2932494/.
[iv] Renuka Sane, Low IBC recoveries are a worry. But solutions lie in cutting court delays, not blaming CoC, The Print (Dec. 7, 2022, 9:49 AM),https://theprint.in/opinion/low-ibc-recoveries-are-a-worry-but-solutions-lie-in-cutting-court-delays-not-blaming-coc/1251201/.
[v] Anish Mashruwala and Anmol Narang, The new Indian insolvency regime: effective, or is the jury still out?, Lexology (Jan. 13, 2023), https://www.lexology.com/library/detail.aspx?g=2348116a-aacd-4795-8211-9de9abfaf3b5.
[vi] Banikankar Pattanayak, Financial creditors’ recovery under IBC at just 10.7%, Financial Express (Aug. 25, 2022, 2:30 AM), https://www.financialexpress.com/industry/financial-creditors-recovery-under-ibc-at-just-10-7/2643102/.
(This article is authored by Mr. Pariekh Pandey, a Senior Tax Law Associate with EY GDS India, and a post-graduate of NALSAR University of Law, Hyderabad. The author can be contacted at pariekh.pandey@gmail.com)
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