Unblock The System

Context: Only by shoring up the insolvency mechanism and tackling huge pendency of cases can confidence of creditors be restored.

Issues in insolvency resolution processes

• Huge vacancies: While hearing a challenge to the Tribunal Reforms Act, 2021, the Supreme Court came down heavily on the government of India for huge vacancies in National Company Law Tribunals (NCLT) and the National Company Law Appellate Tribunal (NCLAT).
  • NCLT: When SC made its observations, NCLT had only 30 members against a total strength of 63.
  • NCLAT had a sanctioned strength of a chairperson plus 11 members but its functioning strength was of eight members.
• Undue state interventions:
  • In appointment process: Recently, Government ignored candidates recommended by selection committee.
  • In Working: Recently Government demanded premature termination of tenure of acting chairperson of NCLAT.
• Huge pendency of cases:
  • 13,170 insolvency petitions were pending before benches of the NCLT.
  • More than 70 per cent of petitions were pending adjudication for over six months as of May 31.
  • In NCLAT, 1,000 appeals under the IBC were pending adjudication as on May 31.
  • A longer resolution period would entail greater value erosion of a corporate debtor, and thereby adversely affecting creditor confidence and ease of doing business.
• Institutional limitations: Institution of information utility, created by IBC, to be the repository of information on debts and defaults.
  • The sole utility in India at present is the National E-Governance Services Ltd. (NeSL), which is not capable to handle 02 lakh debtors in India.
• High haircuts: Going as high as 90%.
• Capacity gap: High number of NCLT judgments gets overturned on appeal, underlining the dearth in expertise and training of members. 

Conclusion: Unless the government now addresses the SC’s concerns, there is a real risk of the court taking matters into its own hands by making appointments itself, or by taking harsher steps like transferring jurisdiction under the IBC to high courts.