Previous Table of Content Next
5

Court Processes to Aid Arbitration: What Is the Impact of Recent Amendments?*

Poornima Hatti

Introduction

The Insolvency and Bankruptcy Code, 2016 (IBC), a consolidated law that deals with the insolvency resolution and liquidation of companies, has now been in effect since December 2016. One of the core features of the IBC is its emphasis on timelines, a feature that is borne out in the preamble to the IBC as well as in the Report of the Bankruptcy Law Reform Committee (BLRC Report),1 which sets out the design and framework for the legislation. The IBC prescribes timelines for different stages in the insolvency resolution process, such as the time within which an application is to be admitted, the time period for submission of claims by creditors, the time period within which a resolution professional is to form a committee of creditors, and so on. The most critical timeline prescribed by the IBC is the timeline for completion of the corporate insolvency resolution process (CIRP). This time period was, until recently (and with respect to the data set covered in this chapter), 270 days and has been extended to 330 days with the passage of the IBC Amendment Act 2019 (IBC Third Amendment), which was notified on 16 August 2019. If a resolution plan is not approved by the committee of creditors within 270 days (now 330 days), the debtor company goes into liquidation.

But have these timelines been followed in practice? The insolvency of Essar Steel Limited, which had been on-going for over 600 days when the National Company Law Appellate Tribunal approved the resolution plan, is a high profile example of the tendency of the CIRP to extend well past the statutorily prescribed period.2 Based on quantitative and qualitative data, this chapter considers the IBC’s track record in adhering to the statutorily prescribed timelines since the law came into effect.3 It also considers the principal reasons for these delays in the context of the evolving jurisprudence around the IBC and what delays mean for the effectiveness of the law and the sanctity of the process it lays down.

Part I provides a brief overview of the IBC and why timelines are particularly important for insolvency laws. This part also analyses data made available by the Insolvency and Bankruptcy Board of India (IBBI) on the extent to which the timelines prescribed by the IBC are being complied with. Part II considers some of the contributing factors for these delays and their implications for the effectiveness of the IBC. In the conclusion, I look forward into the road ahead to explore what these principal causes of delays might mean for the sanctity of the IBC’s process and timelines.

The IBC and Timelines

The principle behind the IBC as articulated in the BLRC Report was straightforward. The law was intended to provide a linear and time-bound process for a company that is unable to pay its debts when due, to either reach an agreement with its creditors (termed broadly as a resolution) or, if such an agreement could not be reached, to efficiently liquidate its assets, which could be put to better use elsewhere. The IBC details the steps to facilitate such a process, a simplified version of which is set out below.

First, either the debtor company or a creditor can initiate an insolvency resolution process under the IBC by filing an application with the relevant bench of the National Company Law Tribunal (NCLT) where the debtor company is located. Once such an application is admitted by the NCLT, a moratorium or ‘calm period’ comes into effect to enable the creditors of the debtor company to arrive at a resolution plan that is intended to allow the debtor company to continue its operations in some form. During the ‘calm period’, no litigation proceedings can be initiated against the debtor company and all existing proceedings are suspended, the idea being that the creditors and debtor company need such a calm period to arrive at a resolution. The IBC gives the creditors a fixed time period (which was initially 270 days and has, as of 16 August 2019, been extended to 330 days) to arrive at a resolution plan, which needs to be approved by 66 per cent of the financial creditors and subsequently by the NCLT. Once a resolution plan has been approved, the debtor company comes out of the IBC process. If the creditors do not approve a resolution plan within the stipulated time period, the NCLT is required to pass an order for liquidation. The IBC also sets out the process for the appointment of a liquidator and the liquidation and distribution of the debtor company’s assets to its creditors, employees, and other stakeholders.

Time Is of the Essence

The BLRC Report, points out that speed is of the essence for insolvency resolution for two reasons:

First, while the ‘calm period’ can help keep an organisation afloat, without the full clarity of ownership and control, significant decisions cannot be made. Without effective leadership, the firm will tend to atrophy and fail. The longer the delay, the more likely it is that liquidation will be the only answer. Second, the liquidation value tends to go down with time as many assets suffer from a high economic rate of depreciation. From the viewpoint of creditors, a good realisation can generally be obtained if the firm is sold as a going concern. Hence, when delays induce liquidation, there is value destruction. Further, even in liquidation, the realisation is lower when there are delays. Hence, delays cause value destruction. Thus, achieving a high recovery rate is primarily about identifying and combating the sources of delay.4

In other words, the value of an insolvent company’s assets depletes rapidly with time. Thus, in order to preserve as much economic value in the debtor company as possible, both to maximise recovery for creditors and to increase the chances of the debtor company continuing in business, time is of the essence. This sense of urgency expressed in the BLRC Report has found its way into the IBC where timelines are prescribed for most steps in the process. Further, the law provides for a very clear consequence if a resolution plan cannot be arrived at within the stipulated timeline: the debtor company must go into liquidation.5

What Does the Data Say?

Based on data made available by the IBBI, as of 31 March 2019, there were 1,800 companies with respect to which applications for commencement of the CIRP had been admitted since the IBC came into effect.6 Of these 1,800 cases, the process has been closed in 715 cases in the manner set out in Table 3.5.1. It should be noted that as the data considered in this chapter relates to the period prior to the IBC Third Amendment when the CIRP was to be completed within 270 days, the data has been analysed with reference to compliance with the 270-day timeline.

Table 3.5.1.Average Pendency (in Days)

As discussed previously, barring cases that are closed prematurely on appeal, settled or withdrawn, the IBC essentially provides for two possible outcomes at the end of the CIRP: approval of a resolution plan or a liquidation order being passed. In both situations, the data available to date suggests that the 270-day time period has not been complied with in a large number of cases. Of the 94 cases where resolution plans have been approved, 62 cases took longer than 270 days, with a few cases nearing 600 days. Companies that have ended up in liquidation have in general taken less time, with 152 of the 378 companies where liquidation orders have been passed taking over 270 days.7 However, these numbers in themselves do not give the entire picture as there are still 1,085 companies which are currently undergoing the CIRP process. Data is not readily available as to how long these cases have been on-going, but given that they are yet to be completed, it is likely that a significant number might have already crossed the 270-day deadline.8

An interesting pattern that the data demonstrates is that the 270-day timeline appears to have been taken more seriously when the IBC first came into effect. For example, of the first 10 resolution plans that were approved prior to 31 December 2017, only 3 went over the 270-day deadline and none over 290 days.9 On the other hand, 26 of the 35 resolution plans that were approved between July and September 201810 and 8 of the 13 resolution plans that were approved between October and December 201811 took over 270 days. There could, of course, be a number of different explanations for why a particular resolution takes longer than 270 days, but the broad trend appears to suggest that crossing 270 days is becoming more of the norm than the exception, particularly where resolution plans are concerned.

Another source of delay that is not captured in the data is the time taken between filing of an application for commencement of the CIRP and the admission of the application. (It should be noted that the time periods discussed earlier relate to the period from admission until approval of a resolution plan or passing of a liquidation order.) The IBC states that the NCLT is required to admit or reject an application within 14 days of filing. However, in my experience and in the experience of other commentators,12 this has not happened in practice, with some benches of the NCLT being particularly slow to admit matters. In fact, in one of the early IBC cases, the National Company Law Appellate Tribunal (NCLAT) held that the 14-day timeline prescribed by the IBC for admission of applications was directive and not mandatory.13 (Incidentally, the NCLAT in that same judgment clarified that the 270-day timeline was mandatory.) Interestingly, the IBC Third Amendment seeks to address delays in admitting cases by requiring the NCLT to provide a reason for delay in any case where it fails to ascertain the existence of a default within 14 days.14 It remains to be seen whether this requirement would put greater pressure on the NCLT benches to admit cases more quickly.

It is still early days to arrive at strong conclusions as the IBC has been in operation only since December 2016. While timelines are not being followed to the letter, it appears to be better than prior regimes and the fact that the IBBI is tracking the time periods closely in its quarterly newsletters is a step in the right direction. However, based on the data available so far, it is clear that that the timelines are not being adhered to as strictly as it was hoped when the law was enacted. In the following section, I explore some possible explanations for these delays and, more generally, what they mean for the sanctity of timelines under the IBC.

Understanding the Delays

Lack of Judicial Capacity

Lack of judicial capacity and over-burdened courts and tribunals are often cited as one of the factors contributing to delays in litigation. In the case of the IBC too, this reason appears to have some merit with many NCLT benches being overburdened with cases and taking several months for admitting applications to commence a CIRP. When the IBC came into effect, the newly constituted NCLTs were saddled with hearing both company law matters as well as IBC cases. This new mandate was not accompanied by an increase in the bench strength of NCLTs, though the Report of the Joint Parliamentary Committee that considered the draft bill15 and other reports speak of the need to increase the capacity of the NCLTs.

Of late, there have been some attempts to increase the capacity of the NCLT with the central government constituting two new benches of the NCLT in Amaravati and Indore in March 2019.16 The Supreme Court, in a recent judgment17 that considered the constitutional validity of the IBC, also directed the central government to constitute additional benches of the NCLAT. It remains to be seen if these measures would reduce the burden on the NCLTs and NCLAT and enable them to dispose of applications more expeditiously.

The capacity of the NCLT benches to hear and dispose insolvency cases in a timely manner requires a detailed empirical analysis which is beyond the scope of this chapter. However, apart from judicial capacity, there are a few IBC specific factors that have contributed to delays and are worth exploring further.

Excluding Litigation Periods

There is a question of how the 270-day timeline was extended in a large number of cases despite the statute providing for liquidation where the 270- day period has been crossed. To date, the tribunals and courts have not technically granted extensions to parties beyond the 270-day deadline. However, the NCLAT, in its order in the case of Quantum Limited v. Indus Finance Corporation 18, stated that any period during which litigation was pending must be excluded when calculating the 270-day period, which has then been followed by various NCLT benches. In most cases, decisions that are made during the CIRP as well as the conduct or outcome of the process have been challenged by various stakeholders: unsuccessful bidders, creditors, employees, erstwhile promoters, to name a few. The NCLAT pointed out that delays caused because of such litigation were outside the control of the parties and it would be unfair to penalise the resolution applicant, the corporate debtor, and creditors for them. The various benches of the NCLT further justified their decision to exclude the period for litigation on the grounds that: (a) under the Limitation Act, 1963, the period of litigation is excluded from determining whether the limitation period has run out; and (b) the rules of the NCLT give the tribunal discretion to consider timelines in the greater interest.

The decision to exclude litigation periods presents an interesting conundrum. On the one hand, it appears to be justified given that, practically, the stakeholders cannot move towards a resolution plan, while litigation regarding the CIRP is pending. However, the approach of excluding litigation periods threatens to dislodge one of the core features of the IBC. Insolvency resolution and restructuring in most jurisdictions tend to be contentious and competitive processes, with challenges to resolution plans being all too common. If such litigation in itself is a reason to not enforce the 270-day time period strictly, the majority of resolution plans would extend well over 270 days. It is also not possible to stop stakeholders from litigating and there is, in the worst-case scenario, a possibility of misuse if parties were to file frivolous claims in order to buy more time.

The central government now appears to have identified the practice of excluding litigation periods as one of the sources for delay as this is explicitly addressed in the IBC Third Amendment. As discussed before, the recent amendment extends the time period for completing the CIRP from 270 days to 330 days.19 However, in addition to doing so, it makes clear that the 330-day period is inclusive of any litigation period. In other words, under the recent amendments, a debtor company would go into liquidation after 330 days regardless of whether the delay is a result of pending litigation against the corporate debtor or other stakeholders in the CIRP. One will have to wait to see if this amendment is strictly enforced by courts and tribunals going forward. Yet, the issue does not end here. In its November 2019 judgment in the Essar Steel insolvency,20 the Supreme Court struck down the word ‘mandatorily’ from this amendment, stating that while the CIRP should ordinarily be completed in 330 days, including the time taken for legal proceedings, there should be room for the adjudicating authority to extend the CIRP beyond 330 days in exceptional cases. One will have to wait to see if this amendment is strictly enforced by courts and tribunals going forward. The court stated:

However, on the facts of a given case, if it can be shown to the Adjudicating Authority and/or Appellate Tribunal under the Code that only a short period is left for completion of the insolvency resolution process beyond 330 days, and that it would be in the interest of all stakeholders that the corporate debtor be put back on its feet instead of being sent into liquidation and that the time taken in legal proceedings is largely due to factors owing to which the fault cannot be ascribed to the litigants before the Adjudicating Authority and/ or Appellate Tribunal, the delay or a large part thereof being attributable to the tardy process of the Adjudicating Authority and/or the Appellate Tribunal itself, it may be open in such cases for the Adjudicating Authority and/or Appellate Tribunal to extend time beyond 330 days.

At one level, not making the 330-day period mandatory has been welcomed by stakeholders as a recognition that delays are often beyond the control of the parties involved and there may be reasons to extend the period beyond 330 days if such an extension could save the debtor company from liquidation. At the same time, this aspect of the judgment again provides room for catering to delays despite the attempt by the IBC Third Amendment to rein in and strictly enforce timelines.

Policy Bias Favouring Resolution over Liquidation

The policy of favouring resolution over liquidation is also relevant to understanding the reasons for delays. While the BLRC Report and the IBC as initially enacted did not express a preference over the outcome of the CIRP, over time, there has been a clear shift in favour of resolution over liquidation that has been articulated by the central government, the Supreme Court21 and the NCLT on several occasions. Two examples of this bias are an amendment to the threshold for approval of resolution plans from 75 per cent of the financial creditors to 66 per cent of the financial creditors22 (making it easier for resolution plans to be approved) and an amendment to the liquidation regulations allowing for businesses to be sold as a going concern during liquidation.23 These types of amendments reflect efforts by policymakers to make changes aimed at avoiding liquidation at all costs. The NCLT have also regularly articulated the bias in favour of resolution over liquidation in their orders.24

This policy articulation is understandable given that, all things considered, it would be preferable for the business of the debtor company to continue in some form rather than for its assets to be sold on a piecemeal basis (as would typically happen in liquidation). Apart from the economic losses associated with liquidation and winding up of companies, there are social costs as well, including the likelihood of a large number of employees losing their jobs. However, it is important to remember that a balance needs to be struck and resolution may not be possible in all situations. Attempting to force a resolution when it is not economically viable to do so might only be delaying an inevitable liquidation.

A by-product of this strong bias in favour of resolution has been delays in completing the CIRP. In a situation where creditors have not been able to arrive at a resolution plan, the policy favouring resolution over liquidation has meant that NCLT benches across the country tend to give several more opportunities to creditors and resolution applicants before passing a liquidation order. An extreme example of this practice was seen in the CIRP of the real estate developer Jaypee Infratech Limited,25 where the Supreme Court ordered the entire resolution process to be restarted. This tendency on the part of tribunals in turn, causes the participants of the CIRP, including resolution professionals, creditors, and resolution applicants, to be less concerned about meeting timelines which they know will not be enforced.

Conclusion

The fact that resolution processes have taken over 270 days should not come as a surprise as merely putting in timeline in a legislation does not guarantee that they will be followed. Events outside a party’s control as well lack of sufficient capacity at the NCLT and NCLAT would mean that it may not always be possible to adhere to the timelines as prescribed. Further, the CIRP may speed up as the law matures and the stakeholders and professionals involved become more familiar with the process.

However, habitual delays as well as a perceived weakening of the resolve of the NCLT to enforce timelines strictly are causes for concern. The practice of excluding the time periods for litigation as well as the strong bias in favour of resolution over liquidation have contributed to timelines being broken on a regular basis.

The IBC Third Amendment appears to address at least one of these sources of delay, though this amendment has, to an extent, been diluted by the Supreme Court’s ruling in Essar Steel. However, the open question remains whether the tribunals would be willing to strictly enforce the 330-day deadline or if their bias in favour of resolution over liquidation would allow them to find wiggle room here as well.

Delays could have an economic impact both at the level of individual cases as well as more systemically for the success of the IBC generally. For individual cases, delays are likely to result in lower recoveries for all parties concerned. Further, it is questionable whether allowing delays would actually serve to favour resolution over liquidation. The longer a debtor company remains in CIRP, the greater the value erosion and the lower the likelihood that bidders would be interested in the resolution of the company, making liquidation the more probable outcome.

At a systemic level, frequent delays raise the question of what this trend might mean for a law that places particular emphasis on the time-bound process it provides for. There may, on occasion, be a good reason to allow for an exception to the deadline, but if this is done too often, would all stakeholders lose confidence in the sanctity of the process itself? Policymakers, courts, and tribunals would do well to consider the long-term effects on the law if timelines are regularly broken.

Notes

  1. Report of the Bankruptcy Law Reform Committee, Vol. 1 – Rationale and Design (November 2015), available online at https://ibbi.gov.in/uploads/resources/BLRCReportVol1_04112015.pdf (accessed on 4 May 2019).
  2. In the case of Essar Steel Limited, the National Company Law Tribunal approved the resolution plan submitted by Arcelor Mittal on 8 March 2019, 587 days after the CIRP was commenced. However, in light of appeals made by dissenting creditors, the Supreme Court has stayed implementation of the plan by Arcelor Mittal. The Supreme Court’s judgment, dated 15 November 2019, finally paved the way for implementation of the resolution plan.
  3. It is important to note that while the IBC includes chapters on both the insolvency or bankruptcy of companies and individuals, the chapter on individuals is yet to come into effect. Accordingly, the scope of this chapter is limited to the insolvency of companies.
  4. BLRC Report, Vol. 1, Chapter 2, ‘Speed is of Essence’.
  5. Section 33 of the IBC states: Initiation of liquidation. - (1) Where the Adjudicating Authority, - (a) before the expiry of the insolvency resolution process period or the maximum period permitted for completion of the corporate insolvency resolution process under section 12 or the fast track corporate insolvency resolution process under section 56, as the case may be, does not receive a resolution plan under sub-section (6) of section 30; or (b) rejects the resolution plan under section 31 for the noncompliance of the requirements specified therein, it shall - (i) pass an order requiring the corporate debtor to be liquidated in the manner as laid down in this Chapter. (Author’s emphasis)
  6. IBBI Quarterly Newsletter, January–March 2019, p. 13, available online at https://www.ibbi.gov.in/uploads/publication/NewsLeter%20Jan-%20March.,%202019.pdf (accessed on 1 May 2019).
  7. These numbers have been arrived at based on the information in IBBI’s quarterly newsletters between December 2017 and March 2019, which provide the insolvency commencement date and the date on which the resolution plan was approved, or a liquidation order was passed for all companies. The author has calculated the time periods based on this information.
  8. Data with respect to the length of a particular insolvency proceeding is only available once the CIRP process has been completed. Data is not available for ongoing CIRPs. It should be noted, however, that the IBC Third Amendment has a retrospective aspect to it. The amendments require any CIRP that has been ongoing for over 330 days at the time the amendment came into effect to be completed within an additional 90 days. It, of course, remains to be seen whether the numerous pending cases will, in reality, be completed within this period.
  9. IBBI Quarterly Newsletter, October–December 2017, p. 11, available online at https://ibbi.gov.in/uploads/publication/news_letter_Oct-Dec17.pdf (accessed on 4 May 2019).
  10. IBBI Quarterly Newsletter, July–September 2018, pp. 12–14, available at https://ibbi.gov.in/uploads/publication/QUARTERLY_NEWSLETTER_FOR_JUL_SEP_2018.pdf (accessed on 5 May 2019).
  11. IBBI Quarterly Newsletter, October–December 2018, pp. 14–15, available online at https://ibbi.gov.in/uploads/publication/QUARTERLY_NEWSLETTER_FOR_OCT_DEC_2019.pdf (accessed on 5 May 2019).
  12. See, for example, ‘Overwhelmed,’ available online at https://www.businesstoday.in/magazine/the-hub/overwhelmed/story/345985.html (accessed on 24 May 2019), which states: ‘As per the Code, if an application filed (with the NCLT) is in order, it should be admitted within 14 days. In reality, it could take at least four-five months to get the matter in,’ says Chawla. Punit Tyagi, Executive Partner at New Delhi-based law firm Lakshmikumaran & Sridharan, concurs. According to him, even fresh matters are not heard for two to three months.’ See also, ‘For NCLT, it is a Race Against Time for Resolution of NPAs,’ The Economic Times, 13 December 2018, available online at https://economictimes.indiatimes.com/news/economy/policy/for-nclt-it-is-a-race-against-time-for-resolution-of-nps/articleshow/67069865.cms (accessed on 24 May 2019).
  13. Juke Mills v. Surendra Trading Company (AT 9 of 2017), dated 1 May 2017.
  14. Amendment to Section 7 of IBC.
  15. Page 78 of Report of the Joint Parliamentary Committee states: ‘The Committee observe that implementation of provisions of the Code, 2015 would be a great challenge with the existing status of setting up of NCLT and NCLAT as well as functioning of DRTs and DRATs. Not only that handling the workload of pending proceedings before the Board of Company Law Administration which with the operationalization of the Code would stand referred to the NCLTs would further add to this challenge. Thus, there is an urgent need to work in the mission mode and expedite setting up adequate Benches of these adjudicating authorities/appellate authorities.’
  16. Ministry of Corporate Affairs Notification, dated 9 March 2017.
  17. Swiss Ribbons Pvt. Limited and Anr. v. Union of India and Ors. (Writ Petition No. 99 of 2018), dated January 25, 2019, para 16.
  18. NCLAT, Company Appeal (AT) (Insolvency No. 35 of 2018), dated 20 February 2018.
  19. Amendment to Section 12 of IBC.
  20. Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Ors., MANU/SC/1577/2019.
  21. In Swiss Ribbons, the Supreme Court articulated that ‘The Code is first and foremost, a Code for reorganization and insolvency resolution of corporate debtors.’
  22. Insolvency and Bankruptcy (Second) Amendment Act, 2018.
  23. IBBI (Liquidation Process) Regulations, 2016, Regulation 32.
  24. For example, the NCLT Ahmedabad Bench, in the case of insolvency resolution of Alok Industries stated ‘...in the interest of the company as well as its employees in view of main object of the IBC as also the very intent of legislature is for the revival of the company and its welfare.’ (IDBI Bank v. Shri Ajay Joshi and Anr., dated 4 January 2019).
  25. Chitra Sharma and Ors. v. Union of India and Ors. Writ Petition No. 744 of 2017, Supreme Court of India, order dated 9 August 2018.