Insolvency and Bankruptcy Code

EoDB at risk if issue of appointments to tribunals is not resolved

Note4Students

From UPSC perspective, the following things are important :

Prelims level : NCLAT, NCLT

Mains level : Read the attached story

While hearing a challenge to the Tribunal Reforms Act, 2021, the Supreme Court came down heavily on the government of India for vacancies not being filled on time. This could severely impact the ease of doing business in India, said the court.

Background

  • The government has lauded the role of the Insolvency and Bankruptcy Code, 2016 (IBC), for improving India’s ranking on the “Ease of Doing Business” index over the last couple of years.
  • However, the SC’s observation is spot-on as vacancies in the tribunals have slowed down insolvency resolution due to the huge pendency of cases.
  • When the SC made its observations, the NCLT had only 30 members against a total strength of 63.

About NCLAT and NCLT

  • National Company Law Appellate Tribunal (NCLAT) was constituted under Section 410 of the Companies Act, 2013 for hearing appeals against the orders of National Company Law Tribunal(s) (NCLT) in 2016.
  • NCLAT is also the Appellate Tribunal to hear and dispose of appeals against any direction issued or decision made or order passed by the Competition Commission of India (CCI).
  • It is also the Appellate Tribunal to hear and dispose of appeals against the orders of the National Financial Reporting Authority.

Difference between NCLT AND NCLAT

NCLT

NCLAT

·         NCLT is established as per Section 408 of companies act, 2013 ·         NCLAT is established as per Section 410 of companies act, 2013
·         It holds primary jurisdiction on cases of insolvency and bankruptcy ·         It holds appellate jurisdictions over the cases judged by NCLT
·         NCLT accepts and analyzes the evidence from creditors and debtors ·         NCLAT accepts and analyzes the decision made by NCLT
·         NCLT collects facts and evidences ·         NCLAT analyzes facts and evidences

CJI’s reservations over Pendency

  • The NCLAT had a sanctioned strength of a chairperson plus 11 members but its functioning strength was of eight members.
  • Both the NCLT and NCLAT have been without chairpersons for several months respectively.
  • These vacancies are concerning because as of May 31, 13,170 insolvency petitions were pending before benches of the NCLT.
  • Of these, 2,785 petitions have been filed by financial creditors and 5,973 by operational creditors.

Note: The IBC created an institution called an information utility to be the repository of information on debts and defaults in India.  The sole utility in India at present is the National E-Governance Services Ltd. (NeSL).

Basis of these cases

  • The financial creditors are facing criticism for taking haircuts as high as 90 per cent against their claims.
  • A longer approval period would entail greater value erosion of a corporate debtor which would be an unattractive proposition for any prospective resolution applicant.
  • This uncertainty can be cured by a faster approval process by the NCLTs by the creation of more benches and filling up of current vacancies.

Why is the Supreme Court fuming over vacancies?

(a) Covid impact

  • The Indian economy is recovering from the adverse effects of the Covid-19 pandemic.
  • During the downturn, financial institutions and banks have suffered higher defaults than usual, impacting the robustness of the system.
  • Lending has decreased during this time and can only be encouraged now by shoring up the mechanism under the IBC to inspire confidence in creditors.

(b) Non-compliance by the govt

  • The SC had granted time to the government till September 13 to take substantial steps in this regard, which was partially complied with by appointing 18 members.
  • The government, however, failed to avoid embarrassment as the CJI expressed his anger at the appointment process which had ignored candidates recommended by the selection committee.

(c) Burden of pendency

  • There is a real risk of the court taking matters into its own hands by making appointments itself, or by taking harsher steps like transferring jurisdiction under the IBC to high courts.
  • One hopes that the situation is resolved quickly to make strict time-bound insolvency resolutions a reality.

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