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Synopsis

The Supreme Court on November 7, 2024, highlighted certain efficiency issues within the NCLTs and NCLAT, noticed over a period of time, reflecting a significant delay in the timely admission and disposal of applications related to initiating CIRP, approving resolution plans, and liquidation. These delays only add uncertainty to the process, prolong disputes, and ultimately jeopardize the interests of all stakeholders involved, it noted.

A bench of former Chief Justice of India D Y Chandrachud and Justices J B Pardiwala and Manoj Misra, while ordering liquidation of grounded Jet Airways due to failure of resolution plan owing to delay, said, adjudication in a time-bound manner would help prevent any further deterioration of the value of the corporate entity. 

"The integrity of the original timelines laid down by the Insolvency and Bankruptcy Code and the resolution plan must not be allowed to be violated since it would dilute the objective of the Code in its entirety, erode investor confidence and hinder all corporate restructuring efforts," the bench said.

Court also asked Parliament to look into its suggestions in consultation with the Insolvency Bankruptcy Board of India and the Ministry of Finance, including on filling up vacancies in NCLTs and NCLAT and avoiding political appointments.

The bench noted members often lack the domain knowledge required to appreciate the nuanced complexities involved in high-stake insolvency matters in order to properly adjudicate such matters. 

"It has been noticed that the benches of NCLT(s) and NCLAT don’t have the practice of sitting for the full working hours. They are particularly lacking in the capacity to manage the growing number of cases and giving undivided attention required in such matters. There are serious issues in the manner in which the insolvency matters are listed. There is no effective system in place before the NCLTs for urgent listings. The staff of the Registry is given wide power to list or not to list a particular matter," the bench said. 

One of the salutary objects of the Code, 2016 is to protect the assets of the corporate entity in timely manner and taken prompt decisions, however, it has become a practice of the NCLT(s) and NCLAT to ignore the urgent mentionings and listings of time-sensitive matters and show no deference to long-pending matters resulting in value erosion of the assets of the corporate debtor and rendering their insolvency resolution process a foregone conclusion, the bench said.

"Over a period of time, this court has noticed the growing tendency amongst Members of the NCLT(s) and NCLAT to ignore the orders of this Court or act in its defiance. We put the NCLT(s) and the NCLAT to notice, that any act of contravention of this court’s order and the larger rubric of judicial propriety will not be tolerated," the court cautioned.

It said the NCLT(s) and the NCLAT must seriously rethink their approach towards admission and disposal of insolvency matters, they should not act as a mere rubber stamping authority and must take their roles seriously in ensuring time-bound hearings and resolutions. 

"Proper and effective hearings both virtually and in-court must be given to insolvency matters of public importance, and the NCLT(s) and NCLAT(s) must earnestly work towards ensuring that the IBC, 2016 achieves its avowed object," the bench said.

Referring to shortfall of members and the lack of requisite strength, which led to Tribunals only sitting for a few days of the week or a few hours in a day, the bench said, "The appointment of new members must be done in a manner such that it coincides with the date of retirement of the sitting members in a seamless manner to avoid such operational inefficiencies. Persons with high ideals and impeccable integrity should be appointed as Members in the NCLT as well as NCLAT. There should not be any political appointment".

Given the importance of the IBC, 2016 for the betterment of the economy at large, the bench emphasised it is imperative that the insolvency ecosystem be continuously strengthened through a regular identification of its shortcomings and a quick redressal of its practical deficiencies, which would significantly improve its implementation and yield better results for all the stakeholders involved. 

"Scrupulous following of the provisions of the Code along with behavioural and ethical discipline is especially required from the key participants of the IBC who are central to its design i.e., the Adjudicating Authorities, Corporate Debtor, Resolution Professionals, Committee of Creditors, potential and Successful Resolution Applicants, Approved valuers and Liquidators," the bench said.

The bench also pointed out the position that the “commercial wisdom” of the CoC is non-justiciable and only a limited judicial review is available in this regard is well-settled through several decisions of the top court. 

Thus, there is no doubt that the commercial wisdom of the CoC cannot be subjected to judicial review, it noted.

However, in order to foster a much more effective and time-bound decision-making by the members of the CoC in the interests of maximization of value of the assets of the Corporate Debtor, certain self regulating guidelines were issued by the IBBI on August 06, 2024 with immediate effect, the court pointed out.

"We suggest that the CoC exercise their commercial wisdom and approve/reject the Resolution Plans placed before them exhibiting fairness and with good reasons. Such a reasoned decision making on their part will only serve to further enable the other key players like the Adjudicating Authorities to understand the rationale behind their decision and to uphold the correctness of the same. Furthermore, it is also suggested that the Central Government or the IBBI explore the possibilities of better enforcement of the standards and practices enumerated in the guidelines through an independent mechanism under the auspices of an oversight committee instead of making them self-regulatory. This will enable the guidelines to achieve some level of practical and operational relevance and also prevent any significant lapse in decision making on the part of the CoC," the bench said.

The bench pointed out that the IBC, 2016 is silent as regards the phase of implementation of the Resolution Plan by the Successful Resolution Applicant. 

"This is mostly due to the fact that each Resolution Plan might be unique and customized to the specific needs of the Corporate Debtor and an excessive amount of statutory control over the implementation of the Plan may prove to be counterproductive to the cause of the Corporate Debtor. However, this has unfortunately led to the consequence of giving excessive leeway to the Successful Resolution Applicants to act in flagrant violation of the terms of the Resolution Plan in a lackadaisical manner. The SRAs repeatedly approach the Adjudicating Authority or the NCLAT for the grant of reliefs in relation to relaxation of the strict compliance to the terms of the Plan, including the timelines imposed therein," it said.

The NCLT and NCLAT more often than not, accede to such requests in exercise of their inherent power, it said.

"The NCLT and NCLAT must not entertain such repeated attempts at violating the integrity of a CoC approved Resolution Plan by accommodating the incessant requests of the Successful Resolution Applicants. The exercise of discretion as regards altering the binding terms of the Resolution Plan, including the timelines imposed, must be kept at a minimum, at best. The NCLTs/ NCLATs need to be sensitised of not exercising their judicial discretion in extending the timelines fixed under IBC, 2016 or the Resolution Plan, in such a way that it may make the Code lose its effectiveness thereby rendering it obsolete," the bench said.

Case Title: State Bank of India & Ors Vs The Consortium of Murari Lal Jalan And Mr Florian Fritsch & Anr