- The Supreme Court held that the National Company Law Tribunal (NCLT) cannot permit withdrawals or modifications of a successful resolution plan, once it has been submitted to it after due compliance with the procedural requirements and timelines, solely at the behest of the resolution applicant.
- The Supreme Court also held that judicial delay should not be a reason leading to the failure of the Insolvency and Bankruptcy Code (IBC) regime like the way it did in the days before the Code came into existence.
- The judgment pertained to the NCLT’s decision to allow Ebix Singapore Private Limited to withdraw its resolution plan submitted for Educomp Solutions.
- The National Companies Law Appellate Tribunal had, however, reversed the NCLT order, saying the latter did not have jurisdiction to permit such withdrawal.
- The correctness of the NCLAT decision had come up on appeal before the Supreme Court.
- The court also drew attention to a report filed by the Ministry of Corporate Affairs’ Standing Committee on Finance on the implementation of IBC.
- The report had noted that a delay in the resolution process with more than 71% cases pending for over 180 days was in deviation of the original objective and timeline for corporate insolvency resolution process envisaged by the IBC.
- This would only create another tier of negotiations wholly unregulated by the Insolvency and Bankruptcy Code (IBC).
- Since the 330 days outer limit of the Corporate Insolvency Resolution Proceedings (CIRP) under Section 12(3) of the IBC, including judicial proceedings, can be extended only in exceptional circumstances.
- This open-ended process for further negotiations or a withdrawal, would have a deleterious impact on the corporate debtor, its creditors, and the economy at large as the liquidation value depletes with the passage of time.
- The court urged the National Company Law Tribunal (NCLT) and the National Company Appellate Law Tribunal (NCLAT) to be sensitive to the effect of such delays on the insolvency resolution process and be cognisant that adjournments hamper the efficacy of the judicial process.
- The judgment is significant as NCLT and NCLAT are among the key tribunals struggling with a burgeoning backlog only matched by their increasing vacancies.
- The NCLT and the NCLAT should endeavour to strictly adhere to the timelines stipulated under the IBC.
- The Bench observed that ‘long delays’ in approving resolution plans under the IBC by the NCLT affect their implementation.
- These delays, if systemic and frequent, will have an undeniable impact on the commercial assessment that the parties undertake during the course of the negotiation.
- The NCLT cannot read too much into its residual powers under the IBC and create procedural remedies which have substantive outcomes on the process of insolvency.
Definition of Bankruptcy:
The legal status of an entity or a person where the debt owed to the creditors cannot be repaid is known as Bankruptcy.
A court order imposes bankruptcy in most of the jurisdictions.
It is mostly initiated by the debtor.
It is important to note that bankruptcy is not synonymous with insolvency.
It is not the only legal status that could be applicable to an insolvent individual or an entity.
In countries like the UK, bankruptcy is exclusive to individuals. Liquidation, administration and other such insolvency proceedings are applicable to entities and companies.
The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.
Objectives of IBC:
- To consolidate and amend all existing insolvency laws in India.
- To simplify and expedite the Insolvency and Bankruptcy Proceedings in India.
- To protect the interest of creditors including stakeholders in a company.
- To revive the company in a time-bound manner.
- To promote entrepreneurship.
- To get the necessary relief to the creditors and consequently increase the credit supply in the economy.
- To work out a new and timely recovery procedure to be adopted by the banks, financial institutions or individuals.
- To set up an Insolvency and Bankruptcy Board of India.
- Maximization of the value of assets of corporate persons.
The Insolvency and Bankruptcy Code (Amendment) Bill, 2021
- The Insolvency and Bankruptcy Code (Amendment) Bill, 2021 was introduced in the Lok Sabha to amend the insolvency law and provide for a prepackaged resolution process for stressed Micro, Small and Medium Enterprises.
- The bill will replace the ordinance that was promulgated on April 4 this year. It proposed ‘pre-packs' as an insolvency resolution mechanism for MSMEs.
- Under this mechanism, main stakeholders such as creditors and shareholders come together to identify a prospective buyer and negotiate instead of a public bidding process.
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