Of the 816 corporate debtors under the resolution process, about 50% have already exceeded the timeline, according to reports.
What makes good companies go bad? The fall of businesses may have a lot of reasons but businesses need a safe cushion to manage the stress and strains that gnaw at an economy to thrive.
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In a span of just two years, the Insolvency and Bankruptcy Code 2016 has proved to be one such cushion for corporates and lenders looking to prevent the failure of quite a few high-profile business houses.
The code rests a lot on the pivot of an efficient time frame to ensure speedy resolution. Remember, this was a cause of concern with the erstwhile Board for Industrial and Financial Reconstruction. A resolution professional has been entrusted with various duties and tasks to ensure in all fairness the protection of the rights of debtors and creditors.
The lawmakers have tried to plug the loopholes that existed earlier. The Ramalinga Raju (of Satyam) case was a precursor to the appointment of a forensic auditor and the Jaypee (real estate developer) case was a precursor to protect the rights of homebuyers, amongst others. The code has played a key role in taking India 30 places ahead in 2018's ease of doing business.
The Case For The Code
What is the case for the code and a body overseeing it? Enormous pendencies before courts lead to the formation of specific tribunals to play the role of a specialised body for providing speedy redressals to a never-ending litigation process present in India.
The National Company Law Tribunal (NCLT), the bankruptcy court, deals with a lot of issues apart from insolvency laws. But with the evolving laws and systems that are put in place, a debate has emerged on whether justice is being served or delayed and the intent of the lawmakers is being met or not. Has the code been successful in alleviating the dreaded nightmare of insolvent companies or has it changed gears to mounting litigation with NCLT?
It is safe to say NCLT cases leave several questions unanswered in the minds of aggrieved parties. The code provides a timeline of 180 days (plus an extension by 90 days) to speed up the resolution process. It is worth checking if such a strict timeline is too short for the resolution professional to make a fair and reasoned application before the NCLT. Of the 816 corporate debtors under the resolution process, about 50 percent have already exceeded the timeline, according to reports from rating agencies.
Random filing of applications without launching an investigation into the matter hurts a debtor who may be innocent and is dragged into the process with no redressal to his grievance. Foreign vendors suffer at the cost of lack of a prior investigation before the filing of an application, adding to the perennial fear of foreign nationals wanting to do business in India. Applications get clubbed and dragged with big matters and are lost in litigation, appeals and stay applications with the NCLT.
Delays in the finalisation of a resolution plan have NCLT to blame. The court acting as a supervisor at each stage of the proceedings ends up as a deterrent to the finalisation of the Resolution Plan.
Too Much To Chew
NCLT currently has 11 benches. In terms of both the infrastructure and the qualifications of the judges, the rescue plan for saving drowning companies is more ambitious than similar processes in London and Singapore. Currently, around 9,000 cases are pending before the NCLT benches in the country for insolvency and other routine matters. NCLT registers about 140 cases a day, with a dismissal rate of not even one case in a day.
Much emphasis has been laid on the importance of a forensic audit under the code but has the qualification of the forensic auditor been specified or a committee of such auditors been formed to investigate the veracity of the reports made by them? Can they be held responsible for a flawed finding in their reports, based on which the resolution professional presents his case? Or does an innocent party have no other option but to concede while the resolution professional takes refuge under the garb of the duty cast upon him under the code.
The resolution professional is not necessarily a qualified chartered accountant/company secretary. Data shows that India already has 1800 qualified resolution professionals and is gearing up for the launch of a Graduate Insolvency Program, whereas the number for a similar law present for almost two decades in the UK is much lower.
Where the lawmakers are placing such exceptional powers on the resolution professional, necessary tools must be available for such professionals to carry out their duty in all fairness and ease. The resolution professional is tied in a tug of war between the creditors and debtors in order to save the company with little or no cooperation from the company.
The bids to find an investor to save the company, after having been approved by the committee of creditors fall flat when the investor withdraws or fails to keep its promise, leading to the restart of the whole process again or an unfortunate doom to liquidation.
Will these missing gaps be filled with tighter and more clearer provisions, conversion of existing Debt Recovery Tribunals to NCLT benches, cross border insolvency provisions? We don’t know. But we do hope that the code evolves to aid a fair resolution and not end up as another law on paper in the garb of a growing and developing India.
Anubha Agarwal is an advocate and a company secretary specialising in corporate, commercial and bankruptcy laws with an experience of over a decade. She is a senior associate at Coporate Law Group.