NCLT, as an adjudicating authority, is often blamed for its failure in ensuring value maximisation of the corporate debtor while approving the resolution plan. As against the professed objective of Insolvency and Bankruptcy Code, 2016 (IBC) for maximisation of value resolution process has resulted haircuts up to 95% for financial creditors. These concerns get compounded when questions are raised on transparency and fairness of the processes in and around corporate insolvency resolution process (CIRP).
Role of NCLT under IBC — passive to COC
NCLT as an adjudicating body is one of the important pillars on which the edifice of IBC rests. It approves resolution plan which amongst others set out haircuts for financial creditors and operational creditors. Its approval, as per perception widely held, legitimise the hair cuts, plan and the related process followed by the insolvency professional (IP) and by the committee of creditors (COC) whose commercial wisdom is treated supreme to the judicial wisdom of NCLT. Further, concerns have been raised over the efficacy of the adjudication process at NCLT as delays therein fast erode the economic value of corporate debtor already in severe distress.
Haircut – primarily a commercial decision
The IBC separates the commercial wisdom on deciding upon viability of a resolution plan from the judicial wisdom consciously. The report of Bankruptcy Law Reforms Committee, which formed the basis for enactment of IBC, emphasised that the business decision to decide the fate of the Corporate debtor should lie on the shoulders of the Creditors in the COC as they are the one who are going to bear the loss of the insolvency and who will have sufficient expertise in dealing with revival or rehabilitation of the Corporate Debtor.
Accordingly, the Code, under Section 30(4), requires the COC to approve the resolution plan by applying its commercial wisdom on its feasibility and viability. The approval of NCLT is based on box ticking of compliance of Section 30(2) which, amongst others, requires the resolution plan to provide for a minimum payment to operational creditors, management of the affairs of the corporate debtor and effective implementation of the plan after its approval. NCLT can either approve or reject the plan. It does not have power to modify or change the plan. In the case of K. Sashidhar Vs Indian Overseas Bank, the Supreme Court held that Adjudicating authority has no role in evaluation of the commercial decision of the COC. In the case of Essar Steel Ltd. the Supreme Court held that power of the CoC can not be delegated to any other body and that a resolution plan once approved by the CoC is binding on all stakeholders.
The role of the NCLT while approving a resolution plan under IBC is limited to ensuring compliance of Section 30(2) and has thus been clearly circumscribed. Judicial wisdom has however been invoked by NCLT in exceptional situations, overriding commercial wisdom of COC, for example in case of Siva Industies, Videocon Industries, Ushdev International where there was no element of common prudence or basic ‘commercial wisdom’ or where resolution plan is against the spirit of IBC or reflective of a collusion between promoter and lenders, or where lenders have acted arbitrarily.
Need to subject commercial decisions to judicial wisdom
While CoCs are best judge to understand and take commercial decisions for the business, it is important that these should be subjected to test of prudence in order to ensure fairness and transparency. The IBC should lay down objective criterion to govern exercise of commercial wisdom by COC. Every case where haircut is more than a prescribed maximum say 30% should further require an scrutiny by an independent external agency or NCLT. In the alternative, in large value cases, say, having outstanding debt of more than Rs 100 Crores, NCLT should appoint a person of eminence as observer on COC. This may also check tendency of some of the secured creditors or that of malignant promoters to prefer liquidation rather than resolution.
A code of conduct for CoCs, to lend credibility to their commercial decisions and process adopted is need of the hour. It would reduce litigations and expedite the resolution process. As per a study, the number of legal cases per IBC case is 3 costing Rs 18 lakhs and delaying resolution by 113 days.
Admittedly, the level of haircut is determined on the basis of the perceived value of the corporate debtor. The measures as above would bring in sanity in exercise of commercial wisdom by COC.
Bring transformational changes in NCLT mechanism
The structure, organisation and efficacy of NCLT mechanism, as an important pillar of IBC, requires a transformational change.
The Parliamentary Standing Committee on Finance in its report observed that as many as 13,170 insolvency cases involving claims of Rs 9 lakh crore are awaiting approval before NCLT and about 71% of these have been pending beyond 180 days. The NCLT lacks IT infrastructure, sufficient number specialised benches for IBC cases and within that separate benches for large value and small value cases, and use of technology in the adjudication process. Further, IBC needs suitable changes to enable and require NCLT to discourage frequent adjournments, frivolous litigations and other tactics resorted to by promoters and other vested interests for delaying and derailing the IBC process.
The writer is Former Secretary, ICAI and Former MD, PTC India Financial Services Ltd.