Pulling back the curtain: examining the NCLT through data

SUMMARY:Delving into the challenges of the NCLT, this blog explores issues like scheduling, clarity of resolution status, and institutional transparency. Based on empirical analysis of NCLT functioning, this blog underscores the need for systematic reforms to reduce delays, improve functionality and enhance visibility into one of India’s key tribunals. This article was written in November 2023.

Key takeaways

Capacity Constraints: From the beginning, capacity challenges have persisted within the NCLT and NCLAT, signalling a need for broad reforms
Empirical Analysis Reveals Uneven Scheduling: A closer look at NCLT’s functioning reveals uneven member scheduling, with only 64% of sanctioned members actively presiding over cases during a three-month period.
Resolution Status Uncertainty: Lack of clarity on case disposal rates and timelines, especially with numerous interlocutory applications, leaves litigants in the dark, hindering their ability to plan and tying up productive resources.
Transparency of institutional performance: Inconsistencies in public data availability may be partially supplemented with detailed insights from the Insolvency and Bankruptcy Board of India (IBBI). However, this standard is not consistently applied for all case types, highlighting the need for more detailed public statistics on institutional performance.

Introduction

On 30^th October 2023, Chief Justice of India DY Chandrachud stated that “… NCLT and NCLAT [have] got down to a rot now”, with Senior Advocate Mukul Rohatgi also remarking that “all is not well” at the tribunal (Sharma, 2023).

These statements were made during contempt proceedings in the Supreme Court, against a bench of the NCLAT. The response was swift, with the Supreme Court ordering the NCLAT chairperson to conduct an inquiry and the members to personally appear before the Supreme Court. In this case, a supervisory authority was apprised of the tribunal’s functioning and took action – leading to the resignation of one member and an unconditional apology issued by the other (Bhan, 2023). But this instance was not a one-off aberration; instead, it was an emblematic of the capacity constraints, high degree of discretion, and lack of institutional transparency which affects all benches of the NCLT and NCLAT in India.

In June 2016, the NCLT was first constituted, under Section 408 of the Companies Act, 2013, to hear matters pertaining to the Companies Act as well as the Insolvency and Bankruptcy Code, 2016. At the time, approximately 25,000 pending proceedings from High Courts, the Company Law Board, Debt Recovery Tribunal and Board for Industrial and Financial Reconstruction were transferred to the new NCLT benches.

It was estimated that it would require 50 NCLT benches, each handling 60 cases at a given time, about 7 years just to clear the existing backlog (Shah et al, 2017). It was also pointed out that merely establishing a new body without addressing the institutional and process-related problems that plagued its predecessors, would not resolve underlying issues.

Over the last eight years, some of these have been addressed – infrastructure, technology, and to some degree, capacity building. For three challenges that persist, i.e. scheduling of members, long resolution times, and institutional transparency, we took an empirical look at current approaches and consider their implications.

Recruitment and scheduling of members:

There have been significant steps taken on recruitment with 34 members added in about the last year, taking appointments to 90.5% of sanctioned positions (BS Web Team, 2023). However, DAKSH analysed NCLT cause lists over a three-month period (Jan-March 2023) and found a combined total of just 40 judicial and technical members (out of a sanctioned strength of 63 members) being scheduled to preside over benches. This indicated that only 64% of sanctioned members were actively sitting during this period.

To optimize members’ time, their schedules are often staggered, with members presiding over multiple benches in a day, in varying combinations. From the sample of cause lists observed, DAKSH observed that Chennai Bench Court-I was listed to begin “After completion of Chennai Bench-II” or “After Principal Bench” for 53 out of 64 lists (~83%). In practice, this leads to chaos for lawyers and lack of predictability for litigants as listed cases may not receive a hearing, adding to long resolution times.

Frequent variations in combination of judicial and technical members can drive uncertainty; given the uniqueness of each individual case, the background, mindset, and discretion of presiding members plays a significant role in outcome. Therefore, the challenge for the NCLT is not merely filling available positions, but ensuring actual sitting of members, consistency of bench compositions, and qualitative strengthening of positions.

Lack of clarity on resolution status:

According to DAKSH’s analysis of 5,110 cases (both closed and ongoing) filed before the Bengaluru NCLT bench from 2016 onwards, only about 50% of the total cases filed in Bengaluru had been decided as on 7^th October 2023. Out of the then ongoing cases, 1,440 cases (i.e. 72%) had been filed prior to 2021.

In this sample, 71% of cases filed were insolvency-related and 28% were Companies Act-related. Nearly 42% of cases were interlocutory applications (IAs), the bulk of which were filed in insolvency-cases.

In this sample, 60% of disposed cases were IAs or similar company applications. Disposal of these cases does not “end the case” or provide resolution to either debtors or creditors. These function almost as satellite litigation and as a result, litigants before the NCLT must contend with confusion about the present status of their case and have no indication of the resolution timeline; as long as these cases remain pending within the NCLT, they are not eligible for further appeal or review.

Availability of public data:

Last, while many steps have been taken to expand the institutional capacity of the NCLT in the last few years, public data on cases filed and patterns of resolution are not regularly available.

Here too, the record is inconsistent, with the Insolvency and Bankruptcy Board of India (IBBI) producing a wealth of detailed quarterly newsletters, which provide statistics on which corporate insolvency resolution processes (CIRPs) yielded resolution plans, their timelines and claim values; they also provides a view on cases admitted, nature of resolution, liquidation status, and other details. This effective breakdown of the process of NCLT insolvency cases can help litigants (whether debtors or creditors) better understand patterns of disposal and potential timelines for closure.

In contrast, Ministry of Corporate Affairs annual reports provide only a high-level snapshot of cases received, pending, and disposed of during each financial year before NCLT. In FY 2021-22, NCLT’s rate of disposal was reasonable with 9277 cases brought during the year and 8619 disposed of (resulting in a 93% case clearance rate). However, NCLAT figures reveal a larger problem: in Delhi, 1704 cases were added with 1112 disposed of (~65% case clearance rate) and in Chennai, 791 cases were added with just 160 disposed of (~20% case clearance rate). The NCLAT Chennai bench saw pendency increase more than tenfold from the previous year, certainly an indication that all is not well.

Long delays in case disposal before both the NCLT and appellate tribunal affects institutional lenders, corporate houses, and so-called sick industries, and suspends productive economic resources in a state of stasis. Both these institutions operate as black-boxes, and their functioning can be difficult to understand, not just for litigants, but even for the lawyers who argue before them, and the members who sit on their various zonal benches. It is, therefore, time for greater attention and collective attempts towards reforming these institutions.