How effective is India's new bankruptcy law? While the confidence in the Insolvency and Bankruptcy Code (IBC) has been steadily growing, as proved by the number of applications to the National Company Law Tribunal (NCLT), the same factor is already challenging the existing resolution infrastructure and leading to significant delays.
According to a recent note by ratings agency ICRA, the number of corporate debtors increased nearly 13% to 816 as on September 30, 2018, from 723 at the end of the first quarter, despite the quarter posting the highest closure of cases seen so far at 123. Moreover, the number of cases admitted by the NCLT also witnessed a decline to 216 in Q2 compared to the previous quarter (244) even though the petitions to NCLT remain significantly high, thereby highlighting the infrastructure issues and the over-burdening of the NCLT benches.
There's more bad news. Of the above-mentioned 816 debtors under the corporate resolution insolvency process (CIRP), about 30% have already exceeded the 270-day deadline specified by the IBC for completing the resolution process, post which the debt-ridden company is supposed to face liquidation. Another 20% of the cases have crossed the 180-day timeline.
The fate of the RBI's Dirty Dozen - the first list of 12 companies to be referred to the NCLT last summer - is a case in point. Only four of these cases have been successfully resolved so far, while seven cases remain unresolved even after more than 450 days of being admitted by the NCLT. As per ICRA's analysis, the lenders to the Dirty Dozen are estimated to have lost out on about Rs 4,000 crore in additional income due to the delays in the resolution process.
The rating agency further observes that "one of the key reasons for the delays in the completion of the resolution process has been the litigations filed by different parties, viz. existing promoters, dissenting creditors or resolution applicants, with the NCLT or the NCLAT, and in some cases, even the Honourable Supreme Court, thereby elongating the entire process".
In certain instances, the final approval by the NCLT on the proposed resolution plan has gotten delayed due to the shortfall in the requisite bench strength to take up the matter in a timely manner. That apart, timely admission of a corporate debtor by the NCLT is also proving to be a challenge. As per the IBC, the NCLT is required to admit or reject an application against a corporate debtor within 14 days of its submission. However, given the significant number of pending applications, the cases are taking significantly much longer time to be admitted by the NCLT.
The high proportion of corporate debtors entering into liquidation has also cast a cloud on the IBC. As of end-September, 212 cases had been resolved through liquidation against only 52 cases where a resolution plan was approved by the NCLT, which led to the financial creditors realising a cumulative amount of about Rs 58,400 crore.
As per ICRA's analysis, the average duration from the date of admission to the date of approval of the resolution plan to move the company to liquidation by the NCLT has been about 260 days for the cases completed till now. Some of these entities were already non-operational when being reported to the NCLT and the delays in the process only further deteriorates the asset value.
In light of the above, the ratings company believes that reducing the timelines for completion of the resolution process remains of utmost importance to strengthen the IBC. "To achieve the same, the unclogging of NCLTs should be a matter of priority. The number of NCLT benches has remained at eleven since the IBC was introduced, whereas the number of cases being referred to the NCLT has been gaining momentum," said the note, adding that judicial strength ought to increase proportionately with the multiplying NCLT applications.
(Edited by Sushmita Choudhury Agarwal)