Union finance minister Nirmala Sitharaman(PTI)
Union finance minister Nirmala Sitharaman(PTI)

Govt plans steps to speed up disposal of cases under IBC

Delays in disposal of IBC cases are having an adverse impact on efforts by banks and financial institutions to recover non-performing assets (NPAs), officials explained
Livemint | By Rajeev Jayaswal, New Delhi
UPDATED ON FEB 19, 2021 11:56 AM IST

The government plans to take measures that will help accelerate the disposal of cases under the Insolvency and Bankruptcy Code (IBC) , which has been suspended until March 31 to avert fresh bankruptcy filings against cash-strapped borrowers who defaulted on loans during the Covid-19 pandemic.

The attempt , which will begin after the suspension period ends, is to improve the percentage of cases disposed of under the IBC as well as to reduce their backlog , two officials aware of the development said. Only 8% of 2,278 cases IBC cases filed with the National Company Law Tribunal (NCLT) since April 2020 have been disposed of so far.

The number of pending cases in the NCLT has, meanwhile, mounted to over 21,250, a substantial jump from the backlog of 19,844 cases as of July 31, 2020; out of these cases, 12,438 cases were related to the bankruptcy law, the officials said, requesting anonymity.

Delays in disposal of IBC cases are having an adverse impact on efforts by banks and financial institution to recover non-performing assets (NPAs), they said.

According to the latest Financial Stability Report (FSR) of the Reserve Bank of India (RBI), the gross NPA ratio of all scheduled commercial banks may increase from 7.5% in September 2020 to 13.5% by September 2021 in a baseline scenario and may escalate to 14.8% under a severe stress scenario.

In order to provide relief from pandemic-hit companies, the government had temporarily suspended the initiation of corporate insolvency resolution processes starting on March 25, 2020, but the IBC process will resume fully soon after March 31, 2021, the officials said.

While the Covid-19 pandemic was one of the immediate reasons for the tardy progress in case disposal, another reason is the backlog of cases at the NCLT.

“NCLT is overburdened with the cases with limited capacity to dispose of the growing number of IBC cases,” one of the officials said.

The second official said speedy disposal of IBC cases is essential to help banks and financial institutions to recover their loans or monetise their NPAs. “The disposal process will be fast-tracked after the protection period is over,” the second official said.

The ministry of corporate affairs and NCLT did not respond to email queries.

L Viswanathan, partner at law firm Cyril Amarchand Mangaldas said: “The functioning of the NCLTs has been severely affected because of the lockdown from March 25, 2020. Some studies indicate that a 95% drop in the number of cases heard by the NCLT during the pandemic. Since June, when several other sectors had resumed their functioning, the effective output of the NCLT was still at 20% of pre pandemic levels.”

As per the Insolvency and Bankruptcy Board of India (IBBI) quarterly report for the period from July to September, 2020, the average time taken for insolvency resolution by an adjudicating authority is 433 days against the statutory mandate of 270 days, he said.

Experts said the Covid-19 pandemic and ensuing lockdown had led to accumulation of cases by paring staff and the number of working days available.

“While the delays may impact the lenders, this may provide adequate opportunity for the companies which are genuine and will rebound as the economy comes to the normal growth trajectory. A fair balance must be maintained,” said Abhishek A Rastogi, a partner at law firm Khaitan & Co.

Viswanathan, however, said delays in initiation and conclusion of the insolvency resolution process would have “obvious and unavoidable adverse impact on the value of the assets and consequently the extent of recovery” from the resolution of such stressed assets.

“Further, longer delays are more likely to result in liquidation scenarios as the assets over time may eventually not remain viable for resolution. Further, the liquidation value itself tends to go down with time,” he said.

He said the delay in resolution of insolvency cases will lead to continued provisioning, which is a strain on the capital of banks that will stifle the ability of lenders to extend further credit to productive sectors.

Rachit Sharma, deputy general manager at tax research and advisory firm Taxmann, said that as of February 10, NCLT had just 41 members -- 20 judicial and 21 technical. With this strength, the NCLT has to deal with matters arising both under the Companies Act and IBC.

He said the delay in the disposal of cases defeated the very objective of the code which was enacted to resolve disputes in a time-bound manner. “Delays in resolution exposes the investors to risk of price fluctuation in stock markets. For lenders, delay adds to the operational losses, destruction of capital, minimum recovery, and increase in the litigation cost,” he said.

The government is taking steps to de-clog the NCLT, Sharma said. “The government has proposed to implement the ‘pre-packaged’ insolvency. Its implementation would further reduce the burden on NCLT as it requires minimum intervention by the tribunal,” he added. Under the pre-packaged insolvency procedure a resolution plan is formulated prior to initiating formal proceedings.

According to Viswanathan, India needs to strengthening technology, infrastructure and human resources to support the NCLTs in handling insolvency resolution matters. “Significant amount of investment is needed in the NCLTs so that they are able to discharge their responsibilities and stick to the statutory time frame,” he said.

“As in the UK, judicial process re-engineering by way of creating a separate machinery that can de-link the judiciary and administrative functions of the Tribunal is required--this could preserve judicial bandwidth,” he said.

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