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 person informed about the matter said. 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, said a second person. Both of them spoke on condition of anonymity.
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, the first person added.
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 court ruled that NCLT and its appellate tribunal had erred in holding that if a corporate debtor was in default of payment, there would be no option for the tribunal but to admit a bankruptcy petition.
This effectively raised the bar for NCLT in admitting more debt resolution cases, said the second person mentioned earlier, although the government has been filling vacancies in the tribunal’s benches.
“Delays for any reason in the commencement of the insolvency resolution process adversely impact value maximization of the corporate debtor, apart from causing delays in resolution and increasing the cost thereof,” said Dr Ashok Haldia, an expert in accounting and auditing.
“Timely resolution of stress in the corporate debtor is critical for retrieving otherwise-blocked productive resources,” he added.
NCLT, the ministry of corporate affairs and the regulator, the Insolvency and Bankruptcy Board of India (IBBI), did not reply to emailed queries.
Bankruptcy resolution under the Insolvency and Bankruptcy Code (IBC) is not necessarily the only solution in a large number of cases where creditors have dragged defaulting businesses to tribunals.
The bankruptcy regulator said in its September quarter update of developments that more than 26,000 applications with an underlying default of ₹9.3 trillion had been withdrawn over a period before admission, indicating settlements between creditors and businesses.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.
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.
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, Mint reported on 1 October last year.