Delay becomes the norm in insolvency & bankruptcy cases
As much as 34% of the 1,292 cases in the bankruptcy courts up to June 2019 are delayed beyond 270 days.
Bankers, lawyers and insolvency professionals say the delays in resolutions are crippling what promised to be a law with strict time lines. If this situation continues then it could undermine the law itself. “One of the most important facets of the IBC (Insolvency and Bankruptcy Code) over earlier regimes for resolution of distress assets was the stricter time lines,” said said Manoj Kumar, partner at Corporate Professionals, aDelhi-based firm. “However, many insolvency cases are increasingly crossing the stipulated time period as those are mired in rising litigations. The share of cases crossing 270 days in proportion to ongoing IBC matters has significantly increased which authorities have to ponder over."
Causes for the delays range from frivolous challenges by operational creditors and promoters to basic issues like shortage of judges.
“There is no stipulated time-line for operational creditors to challenge the rejection of their claim, shortage of members at the bench, allowing intervention by promoters at the admission stage and long gaps between conclusion of hearing and passing of written orders are all causing delays,” said Sapan Gupta, national head banking and finance practice at Shardul Amarchand and Mangaldas.
The delays are also reflecting in a slowdown in cases filed by financial creditors as banks and other financial institutions await clearance of the backlog rather than file fresh cases investing time and money for which there is no guarantee of returns. Data from IBBI show that financial creditors initiated 123 cases in the quarter ended June 2019 down from 178 cases initiated in the previous quarter. The number of cases initiated by operational creditors (151) were also more than financial creditors data from IBBI showed. Late last month both houses of parliament passed the third amendment to the IBC which enforces a new 330-day deadline replacing the previous 270-day deadline and in line with the RBI’s June 7 circular which gave lenders time to find a resolution rather than take defaulters to the bankruptcy court at once.
More importantly, the new amendments upheld secured creditors right over sale or liquidation bankrupt companies negating a NCLAT order in the much delayed Essar Steel case which said secured creditors should be treated on par with operational creditors. The Essar Steel case, delayed for more than two years, has become a barometer for the delays in the bankruptcy code with objections from former promoters to unsecured creditors and even small operational creditors. The delay in judgement in the case has disappointed bankers most of who await recoveries from the profitable sale of the asset valued by Arcelor Mittal at Rs 42,000 crore.
“The reasons for the delays are well known from delays in judgements to promoters filing cases. Unfortunately, our courts are quicker in giving a stay order rather than giving judgements. That has to change. One can only hope that we will soon see an order in large cases like Essar and the recent amendments to the law will remove some blockages,” said Papia Sengupta, executive director Bank of Baroda.