Banks opting for one-time settlement as NCLT waiting time goes up

According to resolution professionals, the delay in admission in some cases can stretch up to 11 months, especially if there is an intervening application while the hearing for admission is on

Delay in admitting cases to the National Company Law Tribunal (NCLT) is prompting banks to opt for one-time settlements for small- and mid-sized companies.

Consider this: Of the 33 cases referred to the NCLT by United Bank of India (UBI), only two have been admitted so far. 

UBI, the sole lender in these cases, has discussed the matter with the NCLT.

“Since a number of cases is waiting to be admitted, we expressed our concern on the matter with the NCLT. The long delay in admission is a serious concern for bankers,” said Ashok Pradhan, managing director and chief executive of United Bank.

The time taken for cases to be admitted is dragging to four-five months whereas the Insolvency and Bankruptcy Code (IBC) prescribes 14 days for admission and 180 days for resolving insolvency with a possibility of an extension by 90 days.

“The pace of admission to the NCLT has slowed. In small- and mid-sized accounts, we are preferring a compromise with promoters,” said Charan Singh, executive director, UCO Bank.

That is showing up in the numbers. The Insolvency and Bankruptcy Board of India (IBBI) data indicate that between January 2017 and March 2019, 1,858 cases had been admitted for the corporate insolvency resolution process (CIRP). Of these, 152 cases were closed by way of review/appeal/ settlement while 91 were withdrawn under Section 12A. As distinct from this, there have been 94 resolutions.

Section 12A of the IBC allows a corporate debtor to withdraw from the NCLT with the consent of 90 per cent of the lenders.

Resolution professionals say the delay in admission in some cases can stretch up to 11 months, especially if there is an intervening application while the hearing for admission is on.

“Sometimes the delays extend to 11 months. Among other reasons are intervening applications while the matter is being heard. There are a flurry of cases and the gap between two hearings is normally 1-1.5 months,” said resolution professional Mamta Binani.

Resolution professional Mohit Chawla’s experience has been that delays in admission can be nine months. Hence, even though banks are referring cases to the NCLT, at the same time they are negotiating with the promoters. 

Saurav Kumar, partner at IndusLaw, said there was a huge surge in restructuring under Section 230 of the Companies Act. “Banks are preferring Section 230 rather than insolvency due to delays and possibilities of better value,” he said.  Section 230 allows creditors to make arrangements with the members of the company to restructure debts.

A major reason for delay in admission or resolution is that the system does not have the machinery to manage the process, said Kumar. Much of it is on account of shortage of NCLT Benches and holidays. 

“There is a need for more Benches,” said Binani. At present there are 14 NCLT Benches, with one at Kochi about to start functioning. 

ICRA Vice-President Abhishek Dafria said despite the delays the IBC would remain but until more Benches were set up, at the court level it would be clogged.

“This is affecting not just admission but the closure of cases too,” he said.

The resolution of the RBI-mandated 12 large accounts, with an outstanding claim of Rs 3.45 lakh crore, initiated in July-August of 2017, is just about half-done. Essar Steel and Bhushan Power & Steel — two big-ticket accounts admitted in August and July, respectively — have been famously delayed. At the NCLT level six plans have been approved so far. 

Dafria pointed out there was a focus on time-bound resolution as manifest even in the revised RBI norms for stressed assets. 

“There are incentives to take cases to the IBC in the new RBI framework that replaced theFebruary 12 circular and there are disincentives in the form of additional provisioning when the 180- or 365-day timeline is breached,” he said.

If resolution is pursued under the IBC, half the additional provision made may be reversed on filing insolvency applications and the remaining additional provisions may be reversed upon admitting the borrower into the insolvency resolution process under the IBC.