NCLT president seeks more manpower to speed up bankruptcy cases
New Delhi, Oct 2, 2024
Synopsis
Amid delays in case admissions under the insolvency law, NCLT President emphasised the need for more manpower. Financial institutions file voluminous documents, complicating legal interpretation. There is a need for reforms and quicker admissions to strengthen India's insolvency and bankruptcy system and support economic growth.
The National Company Law Tribunal (NCLT) requires more manpower to expedite the handling of bankruptcy cases and help in the faster resolutions of stressed assets, its president Ramalingam Sudhakar said on Tuesday.
“Give me the number, I will give you the results,” Sudhakar said at a function to mark the eighth foundation day of the Insolvency and Bankruptcy Board of India (IBBI) here.
The head of the adjudicating authority was responding to concerns about delay in the admission and clearances of insolvency cases.
The sanctioned NCLT member strength of 63 was worked out for handling cases relating to the companies law alone, when the Insolvency and Bankruptcy Code (IBC) didn’t exist (before 2016), he said. Now that NCLT benches are also saddled with IBC cases, on top of the company law ones, the strength needs to be raised accordingly, he suggested.
The corporate insolvency resolution process (CIRP) is supposed to be completed within 180 days and a 90-day extension is granted, subject to the NCLT approval. But, typically, the process stretches on, thanks to litigation and delay in admission. Even a 330-day deadline, which includes time spent on legal proceedings, is hardly maintained.
About 68% of the cases where resolution is currently in progress, the 270-day time frame has been breached, as per the IBBI data.
‘Value erosion before IBC use’
IBBI chairman Ravi Mital said stressed firms, on an average, lose more than a half of their value by the time creditors take them to the insolvency court, calling on critics to factor in such data while blaming the IBC for forcing large haircuts on the lenders.
Mital said the cumulative recovery from stressed companies has been more than 84% of the fair value and 161% of their liquidation value when they were admitted for insolvency resolution.
But the recovery against the creditors’ claims has been to the tune of 32.1%, he said, indicating substantial value erosion before the IBC was tapped by creditors. So, the IBC, he argued, can’t be blamed for the delay caused by lenders and the consequent haircuts.
More than 1,000 bankrupt companies have been rescued through the IBC in the eight years of its existence, fetching the lenders about Rs 3.5 lakh crore, Mital said. Of these, 450 companies were saved in the past two years alone, which also resulted in the recovery of Rs 1 lakh crore, he added.
Under the Indian insolvency ecosystem, financial creditors effectively take the reins of the company when the insolvency application is admitted by the NCLT, which is not the case in many countries where the debtor continues to exercise control over the firm during bankruptcy resolution, Mital said.
So, the Indian ecosystem is more prone to litigations caused by the promoters’ dogged pursuit to retain control of their firms, which lead to delays in rescue of stressed assets and further value erosion, he said, explaining a key reason behind the delay.
Cross-border insolvency
Speaking at the event, India’s G20 sherpa Amitabh Kant called for the roll out of the much-debated cross-border insolvency resolution framework under the IBC.
“From its outset, the IBC has marked a significant shift in India's approach to financial distress. Once, we were often characterised by the notion that India transitioned from ‘socialism without an entry’ to ‘capitalism without an exit’,” Kant said.
This paradigm shifted with the introduction of the IBC, which “provided a much-needed mechanism to address insolvency issues in a time-bound and efficient manner”.
Kant also flagged delay in the admission of insolvency cases, which took an average of 468 days in FY21 and then increased to 650 days in FY22.
“It is essential to minimize judicial bandwidth on administrative matters while opening non-core functions to innovative non-sovereign or private players to deploy technology for improved court management,” he said.
‘Robust IBC needed for strong economic growth’
Chief economic advisor V Anantha Nageswaran said a continuously evolving and improving IBC framework is important to achieving a 7-8% economic growth rate over the next decade.
Macro-prudential tools are handy for muting the effects of credit cycles. “However, a good bankruptcy regime is a backstop during downswings, reducing the need for costly macro-prudential interventions,” Nageswaran said.
Citing research, the CEA said currency mismatches in the corporate sector have reduced after India’s bankruptcy reform. "BIS research from 2018 showed that the probability of the treated group of firms hedging currency exposures increased relative to the years before the law changed. The likelihood of firms with a high degree of currency mismatch issuing ECB loans on a fully hedged basis went up by 13.7% following the introduction of the new bankruptcy law," Nageswaran said.
Similarly, research for a large sample of 4,434 firms between 2000 and 2020 suggests that exporting firms in India have benefitted from the bankruptcy reform law "by helping them better access credit and get out of financial constraints", he added.
[The Economic Times]
