Govt plans steps to speed up disposal of cases under IBC

NEW DELHI: The government plans to take measures that will help accelerate the disposal of cases under the Insolvency and Bankruptcy Code (IBC), which has been suspended until March 31 to avert fresh bankruptcy filings against cash-strapped borrowers who defaulted on loans during the Covid-19 pandemic.

The attempt, which will begin after the suspension period ends, aims to improve the proportion of cases disposed under IBC as well as to reduce their backlog, two officials aware of the development said. Only 8% of 2,278 IBC cases filed with the National Company Law Tribunal (NCLT) since April 2020 have been disposed so far. The number of pending cases in NCLT has, meanwhile, mounted to around 21,250, from 19,844 cases as of July 31, 2020; out of these cases, 12,438 are related to the bankruptcy law, the officials said, requesting anonymity.

Delays in disposal of IBC cases are having an adverse impact on efforts by banks and financial institutions to recover non-performing assets (NPAS), they explained.

According to the latest Financial Stability Report (FSR) of the Reserve Bank of India (RBI), the gross NPA ratio of all scheduled commercial banks may increase from 7.5% in September 2020 to 13.5% by September 2021 in a baseline scenario and even up to 14.8% in a severe stress scenario.

In order to provide relief from the pandemic, the government temporarily suspended the initiation of corporate insolvency resolution processes starting on March 25, 2020, but the IBC process will resume fully soon after March 31, the officials said.

While the Covid-19 pandemic was one of the immediate reasons for the tardy progress in case disposal, another reason is the backlog of cases at NCLT.

“NCLT is overburdened with the cases with limited capacity to dispose of the growing number of IBC cases,” one of the officials said.

The second official said speedy disposal of IBC cases is essential to help banks and financial institutions to recover their loans or monetise their NPAS. “The disposal process will be fast-tracked after the protection period is over.”

The ministry of corporate affairs and NCLT did not respond to email queries.

L Viswanathan, partner at law firm Cyril Amarchand Mangaldas said: “The functioning of NCLT courts has been severely affected because of the lockdown from March 25, 2020. Some studies indicate that a 95% drop in the number of cases heard by NCLT during the pandemic. Since June, when several other sectors resumed their functioning, the effective output of the NCLT was still at 20% of pre pandemic levels.”

As per the Insolvency and Bankruptcy Board of India (IBBI) quarterly report for the period from July to September, 2020, the average time taken for insolvency resolution by an adjudicating authority is 433 days against the statutory mandate of 270 days, Viswanathan said.

Experts said the Covid-19 pandemic and ensuing lockdown led to an accumulation of cases on account of a reduction in staff and the number of working days available.

“While the delays may impact lenders, this may provide adequate opportunity for companies which are genuine and will rebound as the economy comes to the normal growth trajectory. A fair balance must be maintained,” said Abhishek A Rastogi, a partner at law firm Khaitan & Co.

Viswanathan, however, said delays in initiation and conclusion of the insolvency resolution process would have “obvious and unavoidable adverse impact on the value of the assets and consequently the extent of recovery” from the resolution of such stressed assets.

“Further, longer delays are more likely to result in liquidation scenarios as the assets over time may eventually not remain viable for resolution. Further, the liquidation value itself tends to go down with time,” he said.

He said the delay in resolution of insolvency cases will lead to continued provisioning, which is a strain on the capital of banks that will stifle the ability of lenders to extend further credit to productive sectors.

According to Viswanathan, India needs to strengthen technology, infrastructure and human resources to support NCLT in handling insolvency resolution matters.

THE NUMBER OF PENDING CASES IN NCLT HAS, MEANWHILE, MOUNTED TO AROUND 21,250, FROM 19,844 CASES AS OF JULY 31, 2020