By Aayush Mitruka
One of the reasons why the Insolvency and Bankruptcy Code, 2016 (the Code) is being regarded as the path-breaking legislation is because unlike its predecessors it prescribes tight timelines for resolution of sick companies. The relevant provision of the Code provides that the resolution process must be completed within 180 days, which is extendable, in certain cases, up to 90 days.
The stressed asset managers at financial firms as well as asset reconstruction specialists suggested the Bankruptcy Law Reform Committee that 180 days would be a reasonable time to evaluate a stressed entity and propose a solution to keep it as a going concern, for even the more complex cases of insolvency. However, they also recommended a provision for a single extension of another 90 days for complex cases.
Whilst it was intended that the further extension of 90 days was to be given by the adjudicating authority on the request made by the creditors and only after recording a satisfaction, it is seen that the extension orders are being passed in a routine manner and merely on asking. Section 33 of the Code spells out the consequences of non-completion of the resolution within the prescribed time frame. As per the provision, in such a situation, the adjudicating authority is required to pass an order requiring the corporate debtor to be liquidated in the manner as laid down in the Code. The provision is as clear as it can get.
We are currently witnessing the second phase of litigation under the Code where the focus is on the issues surrounding the corporate insolvency resolution process (CIRP) (i.e. post admission stage of insolvency application). The questions related to admission seem to be largely settled now. While considering various timelines under the Code, the National Company Law Appellate Tribunal (the NCLAT) in the decision of M/s J. K. Jute Mills Company Limited vs. M/s Surendra Trading Company held that the time period of 180 days (or 270 days), within which the CIRP must be completed, is mandatory. One of my earlier posts discussing the issue of timelines under the Code can be found here. In this post, I intend to discuss certain instances where the cases have bbeendragged beyond the prescribed time frame of 270 days.
In the case of Quantum Limited vs. Indus Finance Corporation, the corporate debtor (through the Resolution professional) filed for an extension application of the CIRP after the expiry of 180 days. The National Company Law Tribunal (the NCLT) rejected the application since it was not filed before the expiry of 180 days. An appeal was preferred and while allowing the appeal, the NCLAT held that the provisions of the Code do not require the application to be filed before the expiry of the 180 days period. It observed that:
“If within 180 days including the last day i.e. 180th day, a resolution is passed by the committee of creditors by a majority vote of 75% of the voting shares, instructing the resolution professional to file an application for extension of period in such case, in the interest of justice and to ensure that the resolution process is completed following all the procedures time should be allowed by the Adjudicating Authority who is empowered to extend such period up to 90 days beyond 180th day.”
Further, it held that:
“For the aforesaid reasons, we set aside the impugned order dated 18th December, 2017 and extend the period of the resolution process for another 90 days to be counted from today. The period between 181st day and pthe assing of this order shall not be counted for any purpose and is to be excluded for all purpose. Now the Adjudicating Authority will proceed in accordance with law.”
[Emphasis supplied]
The decision in the case of M/s Rave Scans Private Limited is another pertinent decision which deserves to be mentioned. In this case, the committee of creditors (by a creditor representing 35% of the voting rights) rejected the resolution plan without assigning any reasons. Interestingly the resolution plan provided for a sum of INR 51 Crore whereas the liquidation value of the Company was merely INR 36 Crore. The creditor who rejected the plan was unable to furnish any reasons for rejection. In view of the larger public interest and the broad objectives of the Code, the NCLT directed the committee to reconsider the plan even though the 270 days period had already expired.
In the ongoing cases of Essar Steel India Limited, Bhushan Power and Steel Limited and Binani Cement the relevant NCLT benches have extended the time period. While in the cases of Essar Steel and Bhushan Power, the Ahmedabad and New Delhi benches of the NCLT have ordered that the period which is to be consumed in litigation would not prima facie be part of the period prescribed for CIRP under the Code. In the case of Binani Cement, the tribunal has extended the tenure of the resolution professional “till further orders”.
In the decisions highlighted above, what the tribunals have done is essentially stopped the ticking clock and extended the time period for larger public interest. Apart from doing violence to the plain language of the Code, these decisions also bring chaos and inconsistency in the process and grounds of extension. Naturally, this will have a significant impact on the several ongoing and future cases.
The Code envisages filing of multiple applications before the tribunal and surely the mere filing or pendency of the applications cannot be a good ground for stopping the ticking clock (unless a specific order to that effect is passed). The Code is silent on the question of the permissibility of extension of time beyond the period of 270 days. However the Bankruptcy Law Reform Committee while deliberating on the issue of replacement of a resolution professional during a CIRP noted that “in case the application is to remove an RP during the IRP, the removal of the RP does not allow for an extension in the window of time permitted for the IRP: there final date of closure for the IRP remains the same as in the order registering the IRP.”
Notably, it is not uncommon for judicial forums to provide an extension in the exercise of their discretionary power if it is needed to be given for circumstances which are exceptional and to avoid any grave injustice being caused. Given that the Code prescribes a strict timeframe and the consequences of non-adhering to it, it remains debatable whether such extensions are warranted and justified.
Having said that one cannot be oblivious to the fact that if extensions are not granted, these large companies will be sent to liquidation and that may do more harm than good. Although extensions are being granted with noble intentions and aimed towards maximization of the value of assets, they are setting bad precedents. Further, we cannot lose sight of the fact that as the Code is still in its nascent stage and there are several grey areas which are bound to invite litigation. In such a situation, a denial of an extension will not help the lenders and might prove to be counterproductive.
However, at the same time, the need for speed in the working of the Code cannot be overstated. The bigger question here is whether the end could justify the means and therefore for that reason can the mandate of the law be ignored and tossed aside? The line has to be drawn somewhere to preserve the sanctity of a time-bound process because the extensions can otherwise go on and on! Repeated extensions may lead to erosion of time, the value of money and may incentivize the unscrupulous to prolong litigation to abuse the system.
It is important that the desired speed and the stipulated timelines are maintained in the working of the Code and at the same time companies are not liquidated (if the circumstances so warrant) merely due to expiry of the prescribed time frame. A balance has to be created for achieving the lofty objectives of the Code.
Though the 270 days looks acceptable on paper, the apprehensions are not misplaced. One may argue that the 270 days period is not enough for large companies (like the dirty dozen) and it was too ambitious on the part of the legislators to prescribe such a time period in the first instance. The already overburdened courts and tribunals, inadequate infrastructure and a small pool of inexperienced resolution professionals further fortify this argument. The lack of clarity in law and procedure also makes the 270 days target a challenge.
Whilst the high-level panel which was set up to recommend changes in the Code did not consider this issue, it is important that this must also be fixed when the amendments are rolled out. This problem rather demands a practical solution or else the Code will also be rendered like any other law which is plagued by inordinate delays. A combination of factors must be employed to fix this problem and more than anything else this requires some systemic changes.
Aayush Mitruka graduated from ILS Law College, Pune and is presently working with a law firm in Delhi. He regularly writes in India Corp Law blog and can be reached at aayushmitruka.ils@gmail.com.