Have Indian insolvency courts become an Achilles' Heel?
By Dr. Neeti Shikha (Indian Institute of Corporate Affairs) and Urvashi Shahi
After four successful years of India’s Insolvency and Bankruptcy Code (“IBC”), one of its most crucial pillars i.e., the National Company Law Tribunal (“NCLT”) is certainly crumbling. Two main actors who have to show wisdom in a resolution process are the Courts and Committee of Creditors (“CoC”). Recent orders by the NCLT show that over pragmatism at the end of adjudicating authority, especially in commercial matters, often turn out to be precarious for the stakeholder and the corporate entity.
During the insolvency proceedings of Three C-Homes Pvt. Ltd, the CoC approved resolution plan submitted by Ace Infracity developers with a 62.9% vote share, which was considered 100% in favour of the resolution plan. The resolution plan offered to infuse 95 crores over a period of two years. The overall offer stood at one-fifth of the liquidation value which was Rs 480.70 crore. The NCLT has rejected the resolution plan submitted for a housing project by Three C Company located along the Yamuna Expressway in Sector 22 A, saying that the treatment meted to them as financial creditors in the resolution plan seems to be “totally inequitable, unjust and highly objectionable as the successful resolution applicant is taking away the corporate debtor at a value which is nothing but just a pittance” and directed liquidation proceedings against Lotus City. Again, coming to rescue, the National Company Law Appellate Tribunal (“NCLAT”) while remanding back the matter to the NCLT, said liquidation should be the last resort for insolvency resolution process of any residential project and asked the NCLT to review its direction.
A similar case of DHFL wherein the NCLT ordered for reconsideration of the promoter group for the resolution plan at a stage where another resolution applicant was finalised and was waiting only for final approval by the Reserve Bank of India. While in both cases, the NCLAT did stay the orders, the issue of the NCLT’s role in IBC cases remains disappointing. These two cases show that the approach followed by them is not in the interest of law or economic market. When the law has clearly provided that the decision of the CoC is final and that the commercial wisdom of the CoC cannot be replaced by the wisdom of the court, such unwanted enthusiasm by the NCLT only results in more delay. It shudders the standing jurisprudence set by the Apex Court in K. Shashidhar vs UOI that commercial wisdom of the CoC is not open to any judicial review. There is an intrinsic assumption that financial creditors are fully informed about the viability of the corporate debtor and feasibility of the proposed resolution plan.
The NCLT is one of the main pillars on which the success of IBC rests. All the decisions taken among the stakeholders go to the NCLT for the final approval. The inherent powers of the NCLT cannot be equated with that of the Supreme Court. The power of the Supreme Court provided for under Article 142 is the equitable power given to the highest court of law for doing complete justice. Given that the Supreme Court as a court of finality uses this power in insolvency cases to put quietus to cases, it set a precedent for lower courts to follow thereby expanding the jurisprudence of IBC. Tribunals should use its discretionary power for equitable considerations sparingly.
Furthermore, the word equity in matters of commerce cannot be read the same as that in other matters of non-commerce. As jurisprudence is still evolving, there is a confused state of authorities regarding the treatment of equitable remedies and the manifestation of discretion by the Tribunals. Though any categorical rule for exercise of discretion is not feasible, a broader guideline for judiciary, however, would be a welcome move in this direction.
Given the way the NCLT orders are issued, many market players are worried about the certainty of the Corporate Insolvency Restructuring Procedure (“CIRP”) process which now at any stage may be open to challenge and questioned by the commercial courts. Legal certainty and predictability of legal process is the kingpin of the “Rule of Law”. It plays a vital role in determining the space of commercial freedom under which companies can restructure their business. It is central in stabilizing normative expectations of creditors and investors. Orders like this will not only hurt investors' sentiments but also hurt India’s ease of doing business ranking.
There remains a general principle that the court shall be very slow to introduce uncertainty into commercial transactions via the over-ready use of equitable concepts. Pragmatism by courts should strictly be shown only in those places where the due process is not followed. The courts must be very cautious about where to use their power and more so in cases of where such power ought to be restrained. Equity should begin where the law stops! The NCLT must act cautiously in the exercise of its power. As such, maximum delay in the CIRP is being attributed to them, with 27.4% of total delay caused in taking approval of resolution plans from NCLT. History should not blame them for the failure of IBC.