The tribunals dealing with Insolvency and Bankruptcy Code (IBC), 2016 have been subject to criticism mainly due to pendency of cases.

Legal experts say that while the government, courts and the Insolvency and Bankruptcy Board of India (IBBI) have been advancing the cause of Insolvency and Bankruptcy Code (IBC), 2016, they need to introduce stringent guidelines and provide better infrastructure in 2024 to ensure cases are disposed on time.

Ajay Monga, partner at SNG & Partners, Advocates & Solicitors, said: “Year 2024 will surely see more stringent and effective steps by the government to ensure early disposal of the pending matters before the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) by developing a robust infrastructure and more benches.”

IBC was introduced in 2016 to strengthen the corporate insolvency regime. The code introduced timeframes for resolving corporate insolvencies. Data from IBBI, which governs the IBC, shows that the code had helped 2,622 companies (720 through resolution plans, 1,005 through appeals, reviews, or settlements, and 897 through withdrawal of insolvency proceedings till June 2023).

However, the tribunals have been subject to immense criticism, mainly related to the delay in disposal of cases.

As of January 2023, the 15-bench NCLT had over 21,000 pending cases. Of these, close to 13,000 pertain to the IBC.

Mukesh Chand, senior counsel at Economic Laws Practice, said: “Persistent delays in the process still remain a major challenge. Delays significantly escalate costs, diminish enterprise value, and impede recovery. Addressing the challenge of delays in the judicial process would not only set a commendable example but also showcase India as a serious and efficient player in the business world.”

IBC in 2023

Experts have noted that, as of 2023, the apex court has more or less clarified all the lacunae in IBC. “The landscape is now clearer and the system and the players, including NCLT members, are now better equipped, providing enhanced clarity for stakeholders involved in the Corporate Insolvency Resolution Process (CIRP), personal insolvency, and liquidation,” Chand said.

The following judgments of the Supreme Court (SC) are likely to make the implementation of the IBC much smoother in 2024.

Constitutional validity of provisions relating to personal guarantee

In November 2023, the apex court upheld the provisions in the IBC, 2016, relating to personal guarantors. In 2019, the government brought in new provisions in the IBC that enabled a creditor or the Resolution Professional (RP) of a company to move applications under the IBC to enforce personal guarantees by promoters/directors of a company that is undergoing the insolvency resolution process.

For instance, if a company has been admitted into the insolvency resolution process and its promoter had given a personal guarantee to its lenders, the lenders, either on their own or through the RP, can move an insolvency plea against the promoter. The NCLT will then appoint another RP to represent the personal guarantor.

The RP will collate the information related to the nature of the loan given to the company, the amount in default and the role of the personal guarantor. The NCLT, upon analysis of the RP’s report, will determine whether the personal guarantor must be admitted into the insolvency process or not. If a personal guarantor is admitted into the process, his assets will be attached by the RP for recovery of the loan.

Sumant Nayak, senior partner at Desai and Diwanji, said: “This judgment, in my view, has paved the way for creditors to proceed robustly against the promoters/personal guarantors, which were pending adjudication and were kept in abeyance for a long time before the NCLT.”

He noted that the creditors, including banks, are likely to aggressively pursue action against ousted promoters of several companies that underwent insolvency resolution.

Noting that the judgment sets an ‘authoritative precedent’, Monga of SNG & Partners, said: “The judgment clears the air that RP, under the said provisions, does not perform any adjudicatory functions and the principles of natural justice are not violated when he seeks information.”

Government dues not top priority

In the Paschimanchal Vidyut Vitran Nigam Ltd case in July 2023, the SC held that when a company under insolvency resolution process goes into liquidation, its dues to the government takes last priority.

“Firstly, the insolvency resolution process costs and the liquidation costs. Secondly, workmen’s dues for a period of 24 months preceding the liquidation commencement. Thirdly, wages and any unpaid dues owed to employees other than workmen for a period of 12 months. Fourthly, financial debts owed to unsecured creditors. Fifthly, any amount due to the central government and the state government and debts owed to a secured creditor for any amount unpaid following the enforcement of security interest,” the judgement said.

“The SC had held that the dues payable to the government are placed much below those of secured creditors and even unsecured and operational creditors,” Chand said.

NCLT to admit plea by financial creditor, once debt is proven

In May 2023, the SC held that the NCLT has very limited discretion when it comes to admitting an insolvency plea filed by financial creditors, such as banks. According to the judgment, NCLT must satisfy itself whether debt exists or not and admit the plea if default of debt exists.

“In my view, this ruling was much needed to curtail the dilatory practices adopted by the various stakeholders in the CIRP process. This will provide the necessary ammunition to the NCLTs to expeditiously adjudicate the Section 7 applications before it,” Nayak said.

What did not materialise in 2023?

Stakeholders had anticipated amendments to the IBC, enabling project-wise insolvency of real-estate companies in 2023. However, it was not brought in. Termed as ‘reverse insolvency’, it would ensure that not all projects of a real- estate developer are admitted to insolvency when the company runs into trouble. This would ensure that projects that have been completed and are ready for occupancy do not get admitted to insolvency, causing an adverse situation to its buyers/occupants. While courts have started using project-wise insolvency, a law to this effect is yet to be made.

Siddharth Mody, Partner at J. Sagar Associates, said: “The practicality of project-wise insolvency should be assessed on a case-by-case basis. It may be suitable for large developers with multiple projects, where isolating and resolving each project individually is necessary. For smaller developers or projects, a more consolidated approach might be more practical to minimise the administrative burden and expedite the resolution process.”

“Although anticipated amendments to the code such as group and cross- border insolvency and pre-pack for non-MSMEs etc., did not materialise, the IBBI pursued the amendments to the regulations that aimed at addressing procedural gaps,” Chand said.