Introduction:
The National Company Law Tribunal (NCLT) finds itself overwhelmed as more than 7,000 companies are caught in a seemingly endless queue, awaiting resolution of their bankruptcy cases. This unknown backlog paints a bleak picture of the economic landscape, signalling that businesses across sectors are grappling with severe financial distress.
This article explores the roles of the government and the Insolvency and Bankruptcy Board of India (IBBI) in addressing the crisis. Beyond regulatory functions, their collaborative initiatives, legislative reforms, and oversight play crucial roles in navigating through this complex landscape. The study underscores the multifaceted challenges posed by the backlog, extending beyond the corporate realm to impact employment, investor confidence, and broader economic recovery.
The findings provide insights into the collaborative efforts required to ensure the timely and efficient resolution of bankruptcy cases, fostering economic resilience in the face of unprecedented challenges.
Current situation of NCLT
Creditors to about 7,000 companies are waiting for the National Company Law Tribunal (NCLT) to decide on whether to admit these companies for bankruptcy resolution, A source familiar with the situation disclosed, this is more than three times the number of cases currently undergoing resolution before the tribunal’s various benches Apart from inadequate staffing, a Supreme Court order in July 2022 has also made it harder for creditors to admit these companies for bankruptcy rescue.
At present, there are 2,001 cases which are being heard by various benches of the tribunal. Between 2016 and September 2023, the tribunal closed 5,057 cases. Of the 5,057 cases, the tribunal approved resolutions in 15.9% of cases; in 39.5% of cases, the resolution was either settled or withdrawn, and liquidation was ordered in the case of 44.4% cases.
Factors Contributing to the Backlog:
1. Economic Downturns: The global economic slowdown, coupled with the lingering effects of the pandemic, has pushed many businesses to the brink of insolvency. This has led to a surge in bankruptcy filings, overwhelming the NCLT's capacity to handle the caseload efficiently.
2. Inadequate Infrastructure: The sudden influx of cases has exposed the limitations of the current infrastructure supporting the NCLT. From legal personnel to administrative resources, the system is grappling with the sheer volume of cases, causing delays and hindering the timely resolution of financial crises.
3. Staff Crunch: The NCLT is facing a severe staff crunch, further exacerbating the delay in processing bankruptcy cases. Insufficient legal and administrative personnel have been stretched thin, struggling to keep up with the growing number of filings. This shortage has a direct impact on the efficiency of the resolution process, leading to a bottleneck in addressing the financial woes of businesses.
4. Legal Complexity: Bankruptcy cases are inherently complex, involving intricate financial details and legal nuances. The sheer number of cases, each with its unique set of complexities, has strained the NCLT's ability to expedite the resolution process.
The Supreme Court's Role in the Issue
In a dispute between Vidarbha Industries Power Ltd and Axis Bank Ltd, the apex court had ruled that the existence of debt and its default did not automatically mean the case has to be admitted for bankruptcy resolution.
The apex court further said that it was wrong on the part of NCLT and its appellate tribunal to hold a view that if a corporate debtor was in default of payment, there would be no option for the tribunal but to admit it for a bankruptcy resolution. This, the above-cited source, said it prompted the NCLT to admit more bankruptcy resolution cases.
About two-thirds of the companies awaiting NCLT’s decision on admitting bankruptcy petitions are in the manufacturing, real estate and trading businesses, indicating the areas of stress in the economy and signalling potential vulnerabilities in these key sectors.
Concerted Action by Authorities and IBBI
The government and IBBI have been trying to improve the outcomes of debt resolution under IBC, including speeding up admission of cases and shortening the time taken in clearing a corporate turnaround plan. While a new bill to amend IBC is still under consultation within the government, IBBI has been streamlining the process through its regulations. The government started the process of appointing 15 members to tribunals last year and another 21 members this year to fill vacancies in various benches of NCLT.
A source familiar with the situation said in its September quarter update of developments that more than 26,000 applications with an underlying default of 93 trillion had been withdrawn over a period before admission, indicating settlements between creditors and businesses Policymakers expect that fewer cases may be settled before the admission stage, given that the government had in 2020 raised the payment default threshold for initiating IBC proceedings.
Besides the principal bench in the capital, the tribunal has 15 other benches across the country with these appointments, the government estimates NCLT benches to function at 90% capacity, which is higher than that of many high courts, as reported on 1 October last year.
Conclusion
The current scenario of over 7,000 companies waiting in the queue for NCLT admission is a stark indication of the economic challenges confronting businesses in India. The ripple effects of this backlog extend beyond the corporate realm, impacting employment, investor confidence, and overall economic recovery. Urgent measures, such as infrastructure improvements, specialized tribunals, and legislative reforms, are imperative to navigate through this crisis and ensure the timely resolution of bankruptcy cases. The path forward requires a collaborative effort between the government, legal experts, and the business community to address the root causes and build a more resilient and responsive bankruptcy resolution system.
