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Tuesday, September 21, 2021

Panel points out NCLT vacancies to MCA: How appointment delays are affecting resolutions

The committee has also recommended that the IBC be amended to prevent frivolous litigation and non-adherence to deadlines under the IBC that can lead to value destruction.

Written by Karunjit Singh | New Delhi |
Updated: August 8, 2021 11:47:11 am
The committee recommended that the IBC strictly prohibit the submission for resolution plans after the deadline for plans and that recoveries under the IBC be measured against an international benchmark.

The Parliamentary Standing Committee on Finance has called out the Ministry of Corporate Affairs on persistent vacancies in National Company Law Tribunals (NCLTs) leading to delays in corporate insolvency under the Insolvency and Bankruptcy Code (IBC). The committee has also recommended that the IBC be amended to prevent frivolous litigation and non-adherence to deadlines under the IBC that can lead to value destruction.

The committee recommended that the IBC strictly prohibit the submission for resolution plans after the deadline for plans and that recoveries under the IBC be measured against an international benchmark.

Why are vacancies in the NCLT a major issue?

The combined strength of the current NCLT benches around the country is currently only 29 members against the total sanctioned strength of 63 members.

The committee noted that delays in the admission of insolvency cases by NCLTs and the approval of resolution plans were the key reasons behind the non-adherence of timelines under the IBC.

As of March 31, 2016, 79 per cent of the total cases under the IBC had been pending for more than 270 days, the initial time limit envisaged for a resolution process under the IBC.

The committee noted that delays on the part of the NCLT in admitting cases allowed defaulting owners the opportunity to divert funds and transfer assets and, therefore, the NCLT should be required to admit a defaulting company into insolvency proceedings and hand over control to a resolution professional within 30 days.

“The MCA, as the nodal ministry, should take greater responsibility to streamline the operational processes in NCLT/NCLAT while constantly monitoring and analysing the workflow, disposal and outcomes with regard to resolutions, recoveries, time taken, etc.,” the committee noted.

What are the key concerns around frivolous litigation?

A number of high profile cases under the IBC — including those of Essar Steel, Bhushan Power & Steel and Binani Cement — saw multiple decisions being challenged by stakeholders. Experts have called many of these appeals frivolous attempts to slow down insolvency proceedings.

The Standing Committee has also said that cases in which creditors have evaluated resolution plans submitted after the specified deadline would disincentivise bidders from bidding within prescribed timelines and that such plans also contribute to delays and value destruction.

In the insolvency proceedings of Bhushan Power & Steel Ltd, the NCLT had directed the committee of creditors (CoC) to evaluate the resolution plan submitted by Liberty House Pte after the CoC refused to consider the plan as it was submitted after the deadline for resolution plan submission.

“These bidders typically wait for the H1 bidder to become public and then seek to exceed this bid through an unsolicited offer that is submitted after the specified deadline … As a result, genuine bidders are discouraged from bidding at the right time.The overall process is vitiated and there are significant delays leading to further value erosion,” the committee noted.

What are the other key recommendations by the committee?

The committee also recommended that the IBC be amended to provide micro, small and medium enterprises (MSMEs), which are operational creditors under the IBC, with greater protection in the current economic environment. The IBC currently prioritises financial creditors over operational creditors.

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