Union Budget 2024: Increase no. of NCLT benches to make IBC more effective, lawyers tell govt

Add more benches to NCLT, lawyers say

Amid reports suggesting that the Insolvency and Bankruptcy Code (IBC), 2016, may be amended, lawyers have urged the government to revise the code in the 2024 union budget and  increase the number of benches at the National Company Law Tribunal (NCLT).

According to the lawyers, increasing the number of benches will reduce pendency, which in turn will strengthen India’s insolvency framework.

“We can increase the number of courtrooms, and designate them to hear specific petitions at different stages of the Corporate Insolvency Resolution Process (CIRP),  including allowing petitions for administrative work to be listed before Registrar courts,” said Sanjeev Kumar, Partner, Luthra and Luthra Law Offices India.

The newly formed union government is expected to announce the budget for the year on July 23 or  24. Reports suggest that the upcoming budget may finally amend the IBC to address critical gaps and ensure the timely resolution of distressed assets.

The amendments are likely to include redesigning the CIRP to permit financial creditors to drive the resolution for a corporate debtor, outside of the judicial process.

The IBC was introduced to strengthen the corporate insolvency regime. The code introduced timeframes for resolving corporate insolvencies. Data from the Insolvency and Bankruptcy Board of India (IBBI), which governs the IBC, shows that the code has helped 2,622 companies (720 through resolution plans, 1,005 through appeals, reviews, or settlements, and 897 through withdrawal of insolvency proceedings) till June 2023.

However, the tribunals have been subject to immense criticism, mainly owing to the delay in disposal of cases. As of January 2023, the 15-bench NCLT had over 21,000 pending cases, of which close to 13,000 pertain to the IBC. In 2023, it took an average of 643 days for a case to be resolved, as opposed to 270 days as prescribed by the code. This has led to a loss of faith in the IBC process and put a question mark on the insolvency framework.

“Many use the IBC to arrive at a settlement, and it does not help that NCLTs, and even the NCLAT and the Supreme Court encourage settlement by staying resolution proceedings. If a strict no-stay policy on commencement of CIRP was to be followed, then there will be fewer proceedings in the longer run,  and matters will be disposed of faster. This is because promoters will not delay settlement till the CIRP commences,” said Jayesh H, Co-Founder, Juris Corp Advocates and Solicitors

Manmeet Kaur, Partner, Karanjawala and Company, said, “In order to enable the tribunal to reduce the time taken to adjudicate an insolvency petition, it is essential to increase the resources. Further, the government may consider introducing a preliminary screening mechanism to filter out frivolous, or non-substantial, insolvency petitions.”

What other changes need to be made?

There are two kinds of creditors under the IBC: operational creditors (OCs), and financial creditors (FCs). OCs are those who provide goods and services to a business, but have not been paid; FCs are those who lent money to the company.

While the IBC enables both OCs and FCs to initiate an insolvency resolution process upon a minimum default of Rs 1 crore, the Committee of Creditors (CoC) formed after the admission of the case comprises only FCs. The CoC is empowered to approve resolution plans (RPs), and the commercial wisdom of the CoC is held to be paramount. This creates a difference between FCs and OCs.

“The current provisions of the IBC are heavily tilted in favour of (financial) creditors, and there is a growing tendency in the judicial process to term every default a financial  one. This is a dangerous and negative development for the industry, and contrary to the spirit of the IBC, which was designed to promote entrepreneurship,” said Mukesh Chand, Senior Counsel at Economic Laws Practice.

Chand noted that enterprises go through various challenges during their life cycles due to government policies, legal frameworks, economic conditions, wars, climate change, etc., and hence, they require a balanced treatment. “The IBC was  influenced by the failure of the previous system under SICA and BIFR,'' he adds.

Opportunity for promoters

Once a company is admitted to the insolvency resolution process, its affairs are taken out of the hands of the existing management. Instead, the CoC decides the company’s affairs and future, and call for bids, the company ultimately being sold to the highest bidder. Under the existing regime, the original promoters are not permitted to bid for it.

“Amend the IBC to allow promoters to submit a resolution plan, unless they are wilful defaulters or the account has been declared fraudulent. This can provide promoters an opportunity to turn around their business and substantially optimise the value for creditors, thereby reducing delays and litigation,” explained Chand.

He also said that the Ministry of Corporate Affairs (MCA) should implement a system for regular monitoring of the progress of cases before the NCLT. “Reports can be generated to identify bottlenecks and areas for improvement,” he added.