Need for Restructuring the Admission of Application Procedure under the Corporate Insolvency Resolution Process(CIRP) – Mahimna Dave

Need for Restructuring the Admission of Application Procedure under the Corporate Insolvency Resolution Process (CIRP)

Authored by: Mahimna Dave,
IV-Year Law student from Institute of Law, Nirma University

I. INTRODUCTION

The soul and spirit of the Insolvency & Bankruptcy Code, 2016 lies in its preamble. The preamble to the code manifestly emphasizes over completion of Corporate Insolvency Resolution Process (“CIRP”)  as per chapter II of the code in a strict time bound manner with an aim to maximise the values of the assets of the corporate persons as they erode over time.[1] The goals set forth in the preamble of the code for instance; maximisation of the value of assets, promotion of entrepreneurship, availability of credit and balance of interest of all the stakeholders are contingent on the competition of (“CIRP”) in a strict time bound manner.

In light of the IBC, 2016 it is understandable that one of the key-parameters is how long it takes to resolve the insolvent enterprise and how well we realize assets over time as they erode.[2] Thus, “Speed is of Essence” for the working of bankruptcy code.[3] The studies and research findings clearly demonstrate that maximum delay is caused by the admission of applications to initiate (“CIRP”).[4] In light of this article, we aim to examine the delay caused at the stage of admission of an application for initiating insolvency proceedings under section 7, 9 & 10 of the code. Furthermore, we will try to propose resolutions and amendments to be undertaken to recuperate from the delays. 

II. INORDINATE DELAYS AT THE STAGE OF ADMISSION OF APPLICATION TO INITIATE (CIRP)

The stage of admission of application to initiate Corporate Insolvency Resolution Process (“CIRP”) before the Adjudicating Authority (“NCLT”) is explained under Chapter II of the code. Section 7, 9 & 10 of the code provides a strict 14 days’ timeline to the Adjudicating Authority (“NCLT”) to make a decision regarding admission or rejection of the application. The Supreme Court [“SC”] in Arcelor Mittal India Pvt. Ltd. vs Satish Kumar Gupta[5] clearly observed, the entire timeline laid down under section 12 of the code is mandatory in nature as the expression “shall be completed” is used, which makes it clear that the time cannot be extended.

However, the research findings have suggested that the average number of days taken to complete the admission process of application to initiate the (“CIRP”) is 135 days, which means a substantial delay of 121 days.[6] In order to identify the source of delay, the adjudicatory mechanism (“NCLT”) is always held accountable, whereas in practice, everyday adjournments are granted and extensions/exclusions are sought before the tribunal (“NCLT”) by both resolution professionals and litigants. In fact, even the Resolution plans under section 30 of the code are not prepared before the last grant of extension by the tribunal. Moreover, the statutory bodies involved in the matters are also in the practice of applying for condonation of delay on the grounds of ‘public-interest’ which also in turn further restricts the smooth functioning of admission of application procedure.

Considerably, solely holding the Adjudicating Authority accountable for the delay caused is not legitimate and acceptable. There is an essential requirement for a critical assessment of the litigation mechanism under the IBC proceedings. In Surrendra Trading Company vs. Juggi Lal Kamlapat Jute Mills Co. Ltd[7], the courts observed:

“[f]urther, we are of the view that the judgments cited by the NCLAT and the principle contained therein applied while deciding that period of fourteen days within which the adjudicating authority has to pass the order is not mandatory but directory in nature would equally apply while interpreting proviso to Sub-section (5) of Section 7, Section 9 or Sub-section (4) of Section 10 as well. After all, the applicant does not gain anything by not removing the objections inasmuch as till the objections are removed, such an application would not be entertained. Therefore, it is in the interest of the applicant to remove the defects as early as possible.”

Similarly, in the Committee of Creditors of Essar Steel Limited vs. Satish Kumar Gupta & Ors., the hon’ble Supreme Court [“SC”] observed that the timeline of 330 days includes the litigation time taken to complete the Corporate Insolvency Resolution Process (“CIRP”).[8] The following is an excerpt from the judgment:

“[t]he effect of this declaration is that ordinarily the time taken in relation to the corporate resolution process of the corporate debtor must be completed within the outer limit of 330 days from the insolvency commencement date, including extensions and the time taken in legal proceedings.”

Understandably, the above-mentioned judgements explicitly states that the timelines enumerated as per the code are directory in nature as far as the Adjudicatory Authority (“NCLT”) is concerned and not for every single-process under the (“CIRP”) regulation.[9] Thus, there exists a need to examine the inadequacy on the part of resolution professionals and litigants at the stage of admission of application under the (“CIRP”). [10]

A. Causes of Inordinate Delays at the stage of Admission of the Application under (“CIRP”)

The primary reason behind the delays caused the stage of admission of application is the litigation between the corporate debtor and promoters. It prevents the cases from being admitted on several grounds. The promoters of the defaulting entity are in the practice of getting their associates to buy out the company ‘benaami’ and also at a discount which prevents the financial creditors or the operational creditors to commence the (CIRP) proceedings.

The promoters of the defaulting companies don’t like to lose control over the assets of the company and this attitude from the promoters motivates them to get involved in such manipulative activities. Financial creditors also have some role to play in the delay caused at the admission stage. The survey findings suggests that 74% of the applicants (financial creditors) are more interested in getting upfront payments and hence focus towards the rejecting the Resolution Plan (“RP”).[11]

Apart from this, the apprehension in the minds of financial creditors and operational creditors that promoters would drag the cases on for years also contributes in restricting the admission of application process under the (CIRP).[12] Fundamentally, there is a need to change the mindset of all the stakeholders involved in the Insolvency mechanism. It is to be understood that initiation of the process (admission of application) does not mean that the company is going for liquidation.

Further, lack of infrastructure and specialisation in expertise of judges also contributes towards the delay during the stage of admission. Courts and the judges often act as an impediment to the efficient resolution of insolvency.[13] The research findings suggest that the courts are exhaustively involved in regulating the procedural compliance at the admission of application stage which is affecting the entire Corporate Insolvency Resolution Process twofold; first it delays the admission of application stage, second it prevents courts to focus on a timely resolution of those difficult cases where court involvement is important.[14]

Thus, following are the major reasons contributing to the delays at the stage of admission of application to initiate (CIRP):

  • Inadequate Capacity of Resolution Professionals/ Litigants
  • Non-cooperation by Promoters/ Corporate Debtors
  • Inadequate Capacity of tribunal (NCLT)

III. RECOMMENDATIONS TO REDUCE THE TIME TAKEN AT THE ADMISSION OF APPLICATION STAGE 

A. Application for Admission under section 7, 9 & 10 to be disposable on a written plea rather on oral arguments

In order to reduce the delay caused at the stage of admission of application under the Corporate Insolvency Resolution Process (CIRP), it is recommended that the application to initiate CIRP proceedings by the creditor or the corporate applicant should be disposable on a written plea/ arguments rather than on oral arguments. The first time-period in the Corporate Insolvency Resolution Process is highlighted under section 7 (4) & 7 (5) of the code, which states the Adjudicatory Authority is required to either accept or reject the application based on the ’existence of default’ within the time period of 14 days from the date of listing of application in the tribunal (“NCLT”).[15]

Understandably, a cursory reading of section 7 suggests, it is merely an ‘administrative provision’ as the contours of the controversy are clearly defined under the Form 1 of the I&B (Application to Adjudication) Rules, 2016. Thus, the tribunal is only required to examine the ‘existence of default’ and based on the existence or non-existence of the default, it is required to take a decision to either accept or reject the application. This characteristic of the provision clearly suggests that such a process can easily be executed by scrutinizing the written plea/ arguments rather than by holding oral arguments. It will not just save the courts’ time but will also save upon huge litigation costs attached to the Insolvency & Bankruptcy matters and also the trade-off between these two quantities.[16] Furthermore, considering the existing capacity of the tribunals (“NCLT”) in our country, it will prove out to be an attainable and sustainable option.

Moreover, the 99th report of the Law Commission of India briefly observed in relation to the admission of application stage that:[17]

“[i]t appears to us that at the stage of admission, a different approach can be adopted without much difficulty. The principal task of a court at the stage of admission is to decide whether there is, in the material place before it, a prima-facie case that seems to justify invocation of the jurisdiction of the court. For coming to a decision on that issue, written arguments, presented properly in the form of statement of a case/appeal on the lines envisaged in this Report, should, in the vast majority of cases, be sufficient”.

Warren D. Wolfson, Justice, State of Illinois Appellate Court in one of his article’s states, “oral arguments slow things up essentially, when the matters are in their stage of application. We began to fall behind. That’s not good.”[18] Prof McWhinney former member of the House of Commons of Canada and an eminent jurist is also of the view that permitting of unrestricted oral arguments is an historically defined affection of “Anglo-Saxon” legal tradition, which is increasingly unsuitable and irrelevant for busy modern higher courts.[19] A constitutional bench of the Hon’ble Supreme Court of India, in the case of P. N. Eswara Iyer vs The Registrar, Supreme Court of India 1980 held that the court must retain a flexible power in regard to limiting the oral arguments or, in exceptional cases, eliminating orality altogether, the paramount principle being fair justice. Though the court recognized that the right to be heard is an essential component of natural justice principle, it did believe that oral hearing in mandatory in all classes and at every stage of every case.[20]

IV. CONCLUSION

The aim of this article was to address the delay caused at the stage of admission of application process under the (CIRP) in contemplation to evolve a model of operation to resolve the issue. The article investigated the inadequate capacity of resolution professionals/ litigants, non-cooperation by promoters/ corporate debtors and incapacity of tribunal (“NCLT”). Descriptively, the article advocates disposal of application to initiate the Corporate Insolvency Resolution Process (CIRP) at the stage of admission on the basis of a written plea/ arguments rather than on oral arguments. Significantly, it will save the court’s time since “speed is of the essence” in the code’s preamble, as well as saving the litigation costs. In conclusion, this approach will prevent the trade-offs between these two quantities.

Reference:

[1] Bankruptcy Law Reform Committee, Report of the Bankruptcy Law Reform Committee, Vol. 1 (2015)

[2] Ebix Singapore Private Limited and Ors. vs. Committee of Creditors of Educomp Solutions Limited and Ors., (2021) ibclaw.in 153 SC.

[3] OECD List of Indicators, at (http://www.oecd.org/economy/growth/policies-for-productivity-the-design-of-insolvency-regimes-across-countries.html ) (last accessed on June, 21 2022)

[4] K. R. Srivats, Insolvency: ‘prior to admission’ delays dragging down efficiency of IBC The Hindu Business Line (2021), at (https://www.thehindubusinessline.com/economy/insolvency-prior-to-admission-delays-dragging-down-efficiency-of-ibc/article33677072.ece ), (last accessed on Jun 22, 2022).

[5] Arcelor Mittal India Pvt Ltd vs Satish Kumar Gupta, [2018] ibclaw.in 31 SC

[6] Shikha, N., & Shahi, U. (2021, February). IBBI Research Initiative. ibbib.gov.in. Retrieved June 22, 2022, from https://ibbi.gov.in/uploads/publication/2021-02-12-154823-p3xwo-8b78d9548a60a756e4c71d49368def03.pdf (last accessed on June 23, 2022).

[7] Surrendra Trading Company vs. Juggi Lal Kamlapat Jute Mills Co. Ltd, [2017] ibclaw.in 08 SC.

[8]  Committee of Creditors of Essar Steel Limited vs. Satish Kumar Gupta & Ors, [2019] ibclaw.in 07 SC.

[9] Surrendra Trading Company vs. Juggi Lal Kamlapat Jute Mills Co. Ltd, [2017] ibclaw.in 08 SC.

[10] Rajshekar, (2021), The Critical Aspects of Resolution Process, presented at NCLT Webinars, Kolkata (2021) https://www.youtube.com/watch?v=O9CdMgcMeYc.

[11] Supra note. 6

[12] Mishra, L. (2017, August 20). Will Promoters Block the Path? Return to Frontpage, Will Promoters Manipulate the System, (last accessed on June 22, 2022)

[13] Whittred, Greg, & Ian Zimmer. Timeliness of Financial Reporting and Financial Distress, The Accounting Review, Vol. 59, no. 2, 287(1984).  

[14] Supra note. 6

[15] JK Jute Mills Compound Limited vs. M/s Surrendra Trading Company, (2017) ibclaw.in 63 NCLAT.

[16] Mark Spottswood, Live Hearings and Paper Trials, 38 Fla. St. U. L. Rev. (2011).

http://ir.law.fsu.edu/lr/vol38/iss4/3, (Last accessed on 22 June, 2022)

[17] ibid

[18] Warren D. Wolfson, Oral Arguments: Does it Matter, Indiana Law Review, Vol.35:451.

[19] Law Commission of India, Oral and Written Arguments in the Higher Courts, Report No. 99 26 (April 1984).

[20] P. N. Eswara Iyer vs The Registrar, Supreme Court of India, AIR 1980 SC 808.

 

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