Finance Panel for appointing HC judges as NCLT members to reduce litigation

Bank funds worth Rs 9.2 trillion struck in NCLT; committee wants benchmark on quantum of haircuts as in many cases, they are as high as 95%

Taking a grim view of the sagging recoveries by the banks and a huge delay in the entire process, the Standing Committee on Finance of the Lok Sabha today recommended overhauling the entire IBC (insolvency and bankruptcy code) process, rejecting any bids which comes after the lenders select the highest bidder and appointment of high court judges in the NCLT (National Company Law Tribunal) as judicial members in order to reduce litigation.

In its report, the committee noted that 71 per cent cases are currently pending for more than the mandatory 180 days in the NCLT, which points out the deviation from the original objectives of the code as envisaged by the Parliament. The Indian banks' funds worth Rs 9.2 trillion are currently stuck in the NCLT after they took defaulters to the court under the code.

Asking for a thorough evaluation of the entire process, the committee said it is imperative to have a benchmark for the quantum of haircuts, comparable to the global standards, as the haircuts in many cases are as high as 95 per cent.

On the role of resolution professionals, the committee said a professional self-regulator for RPs that functions like the Institute of Chartered Accountants of India (ICAI) should be put in place. The committee, therefore, recommended that an Institute of Resolution Professionals may be established to oversee and regulate the functioning of RPs so that there are appropriate standards and fair self-regulation.

On the delay at NCLT, the committee noted that the NCLT takes considerable time to admit cases and during this time the company remains under the control of the defaulting owner enabling value shifting, funds diversion, and asset transfers. “The NCLT should accept defaulters within 30 days and transfer control to a resolution process within this time period,” the committee recommended.

The committee noted that when the invited bidders are asked to submit their respective resolution plans and when these resolution plans are evaluated by the CoC, suddenly other bidders may emerge and submit their own resolution plans. “These bidders typically wait for the H1 (highest) bidder to become public, and they then seek to exceed this bid through an unsolicited offer that is submitted after the specified deadline. Currently, the CoCs have significant powers to accept late bids and these unsolicited bids create a huge delay,” the report said.

The committee, therefore, recommended that the IBC be amended so that no post hoc bids are allowed during the resolution process.

The committee said as the cases decided at the NCLT are litigated at the NCLAT and the SC, it is imperative that the NCLT members should be highly trained and well experienced. “The committee believes that the NCLT judicial members should be at least High Court judges so that the country will benefit from their procedural experience and wisdom.

The report, tabled in the parliament today, said financial creditors took 4,356 companies to NCLT under the IBC to recover Rs 6.77 trillion, while the operational creditors moved the court against 8,331 companies to recover their dues worth Rs 78,000 crore. In 266 cases, the companies themselves moved the NCLT after they failed to repay debt worth Rs 52,000 crore.

On the low recoveries by the banks under the IBC with haircuts as high as 95 per cent, the committee report quoted the Secretary of the Ministry of Corporate Affairs who said initially, when the companies came to the IBC, 33 per cent of the companies that were rescued were defunct and virtually did not have anything. Of the companies that actually liquidated, almost 73 per cent of these companies were defunct.

The MCA said recovery also depends on what stage a company comes to the IBC. "If it is at a stage where it can be revived and restored and, if it is resolved, the results will always be better. We can show previous cases where it has come at a proper stage and even the recovery, though incidental, has been quite good and there have been cases where recovery has been even up to 80-90 per cent also," the Ministry informed the committee.

"Nevertheless, the resolution value is almost 188 per cent of the liquidation value.  If the companies come for resolution the alternative is to go for liquidation, then they will get much lesser value than what they are getting now. The IBC is not designed for haircut, but the commercial wisdom is lying with the Committee of Creditors. If the CoC does not agree to a 90-95 per cent haircut, then the plan will not go to NCLT. If it does go to NCLT, then it will not be approved and then the company will go for liquidation or financial creditors will have to go for another mode of recovery," the report said.

The recommendations

· Reduce delay in admitting new cases at NCLT

· Do not allow fresh bids once highest bidder is selected

· Have a benchmark for haircuts

· Impart better training to NCLT members

· Fill up vacancies at NCLT

· Allow sale of assets in parts to get better value

· Delete liquidation regulations under the IBC