By Amitabh Kant and Richa Roy
Last week, the Supreme Court struck down as ultra vires — acting or beyond one’s legal authority — the February 12, 2018, RBI circular that instructed banks to trigger insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) against borrowers with defaults above a specified amount.
This means banks are no longer bound by RBI to take defaulting borrowers to the National Company Law Tribunal (NCLT). A constructive approach, however, may be used to retain IBC’s promise.
NCLT’s capacity is a critical issue. It’s required to adjudicate on the full gamut of matters under the Companies Act 2013, as well as those under IBC. This has placed severe strain on NCLT. About 30% of the more than 800 ongoing cases under corporate insolvency resolution process (CIRP) have surpassed the time ceiling statutorily prescribed, with an additional 20% having crossed the six-month timeline.
The recent induction of 38 new members into NCLT is extremely welcome. But it’s crucial for the tribunal to inculcate specialisation as well as depth in its expertise. One way could be to set up specialised NCLT benches to deal only with insolvency matters. China set up specialised bankruptcy courts during 2007-17. In their 2018 study, ‘Going Bankrupt in China’ (bit.do/eNKZx), Bo Li and Jacopo Ponticelli show that courts brought faster resolution of financially distressed firms, improved access to credit, and pushed local private firms to invest more. India could learn from this.
A major success of IBC has been the deterrent effect it has had. For such settlements to be more effective, they should take place in a structured manner, similar to a ‘pre-pack arrangement’.
Pre-packed insolvency arrangements are relatively common in Britain, allowing for the sale of a business as a going concern prior to the appointment of an administrator or insolvency professional, subject to the approval of a majority of the creditors. A similar proposal, the European Restructuring Directive, was approved by the European Parliament last week.
This will, however, require checks and balances to prevent it from being gamed or used tactically to subvert IBC. They could include a code of conduct to be issued by the Insolvency and Bankruptcy Board of India (IBBI) to regulate the behaviour of the resolution professional dealing with the pre-pack. Additionally, guidelines on the conduct of the creditors, permitting holding-out creditors to be ‘dragged along’ as well protection for certain creditors and the manner in which this will be made binding on all creditors, should be drawn out.
The corporate affairs ministry has been working on a template. Along with industry and IBBI, a framework can be developed. RBI’s circular had provided for a resolution process prior to referring to a borrower to IBC. The pre-pack arrangement with safeguards could replace this.
Certain existing provisions of IBC and its subordinate legislation can be revived and utilised more effectively. Under Section 61, for instance, appeals from NCLT to the National Company Law Appellate Tribunal (NCLAT) are permitted under certain tightly circumscribed matters of law, and as a creature of statute, NCLAT has to comply with this. And, yet, there are multiple instances where it has overstepped this mandate, ruling on the process of resolution in certain instances, including on the share of the classes of lenders.
It is true that NCLT and NCLAT have often had to adjudicate on disputes, making the adjudication process complex and time-consuming. There are, however, certain innovations possible, even within IBC. Economists Oliver Hart, Philippe Aghion and John Moore, in their paper ‘Improving Bankruptcy Procedure’ (bit.do/eNK8y), propose a procedure that should resolve insolvency in 90 days.
They acknowledge that certain contentious claims and disputes can’t be resolved in this period, and propose that the plan be voted upon with contentious claims remaining outstanding. It could be settled following the approval of the plan. IBC could incorporate this principle.
IBBI’s Corporate Insolvency Resolution Process Regulations’ Regulation 14 provides that where the amount claimed by a creditor is uncertain, the resolution professional shall make the best estimate of the amount of the claim based on the information available with her, and revise the estimate of the claims she comes across additional information warranting such revision.
This would allow the resolution process to continue with such contentious claims being resolved subsequently. Further, under Section 31of IBC, the order passed by NCLT or NCLAT approving a resolution plan provide for ongoing implementation and supervision of the plan, which could include the adjudication of such disputes.
With some of these innovations, IBC could deliver even better outcomes, and lenders voluntarily file proceedings, and not on account of a dikat from their regulator.
Kant is CEO, NITI Aayog, and Roy is a lawyer involved with the drafting of IBC