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Tuesday, January 24, 2017

Judicial Procedures will make or break the Insolvency and Bankruptcy Code

by Prasanth Regy and Pratik Datta.

The key test of any default resolution process is: how much value is recovered by the lender? The most important factor that determines this amount is the time taken to complete the resolution. India has set up many recovery mechanisms that have given us long delays and low recovery rates. Most of the delay in the resolution is due to poor judicial processes that enable parties to obtain repeated adjournments.

The Insolvency and Bankruptcy Code (IBC) offers us a new beginning to fix the problem of low recovery. It imposes several timelines on its Adjudicating Authorities (National Company Law Tribunal (NCLT) for corporate defaults and Debt Recovery Tribunals (DRT) for individuals). For instance, it requires these tribunals to complete insolvency resolution in 180 days. It also requires NCLT to ascertain the existence of corporate default within 14 days of an application. Commentators have pointed out that without digitised credit data from Information Utilities (IUs), it will be difficult to adhere to these timelines. In this article, we argue that even with the IUs in place, it will be difficult to meet the timelines unless NCLT's procedures are redesigned.

1  Triggering Insolvency Resolution


As an example of an IBC time-limit, consider the process laid out by the Code in the case of a corporate default. A creditor can apply to NCLT to initiate an Insolvency Resolution Process (IRP) against the debtor. Along with the application, the creditor needs to do two things: furnish evidence of default recorded in an IU (or other evidence of default); and propose the name of a resolution professional (RP).

On receipt of the application for IRP, NCLT has 14 days to accept or reject it. The application is accepted only if NCLT is satisfied that default has occurred, and that the proposed RP has no disciplinary proceedings pending against him. Now let's see how this process will actually work out under the current NCLT rules.

2  Current procedure


Matters filed in NCLT under IBC are governed by the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Under this, the procedure for making an application under IBC is the same as that for company matters before NCLT. These rules require applications to be:

type-written, lithographed or printed in double spacing on one side of standard petition paper with an inner margin of about four centimeter width on top and with a right margin of 2.5. cm, and left margin of 5 cm, duly paginated, indexed and stitched together in paper book form.

E-filing is promised eventually: the application ... shall be filed in electronic form, as and when such facility is made available. Online payment of fees is not allowed: fees can be paid only by means of a bank draft.

NCLT has to make a reference to IBBI to check if there are any disciplinary proceedings pending against the proposed RP. This reference will be sent by post, and the reply from IBBI will likewise come by post. It is not clear how IU records are to be submitted to NCLT: if the Tribunal requires that all IU records need to be certified by a senior officer of the IU (like in the case of bank records) it will lead to more delays.

All these have to be done while the NCLT is dealing with its workload under the Companies Act. On top of these, it is estimated that under the IBC, about 25000 cases will be transferred to NCLT from Company Law Board, the Board for Industrial and Financial Reconstruction (BIFR), the High Courts, and DRTs. This combination — a gargantuan workload, and slow processes to deal with it — makes it unlikely that the NCLT will be able to respect the IBC timelines.

3  Redesigning procedures


The Bankruptcy Law Reforms Committee recognised this problem and suggested the extensive use of technology by NCLT and DRTs to achieve efficiency. If we are serious about meeting the IBC timelines, NCLT's procedures will have to be designed anew.

Let us revisit the previous example in this light. Submission of the application for initiating IRP should be electronic: all documents, including IU records, should be submitted online. This will make it easy to verify the evidence of default. The tribunal must not require any certification from IU officials that the IU record is authentic — the digital signature on the IU record should suffice. Verifying the RP's antecedents with the IBBI should be automated: it should only involve a computer at the NCLT querying another computer at IBBI. With these processes, the tribunal stands a far better chance of meeting the 14-day timeline.

Of course, meeting this deadline in and of itself is no fix to the issue of delayed recoveries. However, this deadline is crucial for two reasons: firstly, because insolvency resolution cannot begin till the application is accepted, so any delay in this process delays the eventual resolution as well; and secondly, once a precedent of ignoring IBC timelines is established, there is no reason to respect the sanctity of any other timelines in the Code, including the 180-day limit on resolution. The Code will lose one of its most compelling features.

4  Conclusion


India has been here before. We have created a long list of mechanisms to facilitate the recovery of debts. This includes the BIFR set up in 1987, the Company Law Board set up in 1991, the Recovery of Debts Due to Banks and Financial Institutions Act passed in 1993, and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act passed in 2002. The RBI also has tried several schemes, including Corporate Debt Restructuring (2001), Joint Lenders' Forum (2014), Strategic Debt Restructuring (2015), and the Scheme for Sustainable Structuring of Stressed Assets (2016). None of these have been successful in resolving defaults efficiently.

We have another list of laws (including the IBC) that seek to impose deadlines on the judiciary. In the absence of rigorous process design, such attempts to eliminate judicial delays through legislative fiat have not worked either. Instead, there is ample precedent of ignoring these deadlines.

Now the IBC affords us yet another opportunity to achieve the goal of prompt recovery of debts. High-quality intellectual work is required to design and implement good judicial procedures for NCLT and DRT. If we do not make this investment now, IBC will also be a failure.


References


Bankruptcy Law Reforms Committee. The Report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design. Government of India, 2015.

Prasanth Regy, Shubho Roy and Renuka Sane. Understanding Judicial Delays in India: Evidence from Debt Recovery Tribunals. Ajay Shah's Blog, May 18, 2016.

Pratik Datta and Ajay Shah. How to make courts work? Ajay Shah's Blog, February 22, 2015.



The authors are researchers at the National Institute of Public Finance and Policy, New Delhi. We thank Anirudh Burman, Suyash Rai, and three anonymous referees for helpful comments.

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