Recasting Insolvency Resolution

The recent Supreme Court judgment in the Jet Airways insolvency case has highlighted the inefficiencies and structural problems in India’s insolvency resolution process under the Insolvency and Bankruptcy Code (IBC). The judgment has brought attention to the shortcomings of the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT), which are pivotal in the implementation of the IBC.

Institutional Capacity and Efficiency Issues:

• Institutional Overload: The NCLT and NCLAT are burdened with both corporate insolvencies and cases under the Companies Act. With a sanctioned strength of only 63 members, many of whom are stretched across multiple benches, these tribunals are struggling to meet the demands of the insolvency process, leading to delays.
• Operational Shortcomings: Many NCLT benches fail to operate a full working day, even when not dealing with cases from other benches. This operational inefficiency exacerbates delays, with the average time for insolvency resolution increasing to 716 days in FY2023-24, up from 654 days the previous year.
• Supreme Court's Concern: The Supreme Court has repeatedly emphasized the need to adhere to the timelines set by the IBC. The Jet Airways case specifically underscored that NCLTs/NCLATs should not have the discretion to extend deadlines, as it risks undermining the effectiveness of the Code.

Lack of Domain Expertise and Bureaucratic Challenges:

• Need for Specialised Knowledge: The NCLT’s current structure lacks sufficient domain expertise, which hinders its ability to resolve complex insolvency cases. Members often lack the necessary background to deal with high-stakes matters, resulting in poor decision-making.
• Bureaucratic Inefficiencies: The absence of an effective system for urgent listings and wide powers given to Registry staff to decide case listings has added another layer of delays. Moreover, there is a growing tendency among NCLT/NCLAT members to ignore Supreme Court orders, undermining judicial integrity.
• Impact on Institutional Integrity: The procedural inefficiencies and lack of expertise not only delay resolutions but also threaten the integrity of India’s insolvency process, which is crucial for ensuring fair economic governance and justice.

Procedural Framework and Need for Reforms:

• Mandatory Hearings and Delays: The requirement for a mandatory hearing for all applications, including progress reports, is not necessary for natural justice and causes unnecessary delays in the process, further congesting the system.
• Underutilisation of Alternative Dispute Resolution (ADR): India’s insolvency framework underutilizes ADR mechanisms like mediation, which could offer faster and more efficient solutions. A more robust use of ADR could help ease the burden on the already overworked tribunals.
• Reform Proposals: Reforms such as mandatory mediation before filing insolvency applications and the creation of specialised benches for different types of cases are promising solutions. Additionally, infrastructure improvements, including more courtrooms and qualified support staff, are essential for sustaining the insolvency process effectively.

Practice Question:

Q. Examine the structural issues and inefficiencies within India’s insolvency resolution process under the Insolvency and Bankruptcy Code (IBC), and suggest reforms to enhance its effectiveness in addressing corporate insolvencies.