‘It is time NCLT imposes heavy costs on petitioners filing frivolous cases to delay resolution process’

Senior Supreme Court lawyer Tarun Gulati, who is also an active practitioner in the insolvency and bankruptcy space, is at his candid best as he answers some of the trickiest and most relevant questions on insolvency law in India. Here’s an excerpt:

It’s been four years since the Insolvency and Bankruptcy Code (IBC) has been implemented. What according to you are its biggest achievements and shortcomings?
In terms of achievements, I think the number of cases that get settled before admission of an application are very high. Prior to IBC, it would take years before a civil suit or a winding up application may lead to consequences for a creditor. However, under the IBC, the time taken to admit an application is comparatively very less, and the consequences of an admission order are severe — the immediate discharge of the board. This, in my view, is the reason for the high percentage of cases that get settled. In terms of shortcomings, the time taken to dispose off an application is higher than the 14-day period contemplated under the IBC. This is because the NCLTs have been flooded with insolvency applications after the commencement of the IBC.

What do you think can be done to expedite the resolution processes under IBC?

I think better talent must be attracted in terms of the resolution professionals and liquidators. The key, in my opinion, is to ease the regulatory requirements for the resolution professionals while maintaining the necessary regulations needed for safeguarding the resolution process.

Some experts say that the IBC courts have been too lenient on frivolous petitioners whose only aim is to delay the insolvency process. What is your view on this?

One may say that it is true. Most of the NCLTs have refrained from imposing costs in cases of frivolous applications citing the nascent stage of the IBC. In my view, time has come to impose heavy costs while dismissing such applications.

Do you think IBC has been effective enough to give justice to hundreds of home buyers stuck with projects of insolvent real estate companies?

The problem concerned with insolvent real estate companies is a complex one, primarily because of the huge number of stakeholders involved. In my view, the only effective way of resolution for these companies is for a real estate company to take over and hand over the units to the allottees. This poses challenge because the funds required to complete such projects may not give any returns, much less ideal returns, to an entity that takes over.

Do you think operational creditors and sometimes unsecured financial creditors get a raw deal under IBC? Do you think something can be done about it or is it just a necessary evil?

I think it is true that operational creditors and unsecured financial creditors get an unfair deal under the IBC. This is especially true in cases of insolvency resolution as opposed to liquidation of an entity. The problem arises because the committee of creditors is solely constituted of financial creditors, who get to decide the fate of the insolvent entity. Any prospective resolution applicant has to offer money solely to financial creditors in order to secure a vote for approval of the resolution plan. Further, the law prescribes that in case of insolvency resolution, the operational creditors must get the liquidation value. In most cases, the liquidation value for operational creditors is nil. This is the root cause for operational creditors to get an unfair deal in case of insolvency resolution. In case of liquidation, since the secured creditors are placed on top in the priority of pay out, the unsecured financial creditors as well as the operational creditors end up getting no money.

I think to an extent it is a necessary evil. However, the law could prescribe a proportion of pay out to be mandatorily provided to operational creditors in case of successful resolution.

Have you ever got the impression that government departments like the customs and tax departments, SEBs, etc deliberately delay the process knowing well that being operational creditors they will receive pennies under IBC?

I feel that happens because of the laxity that is prevalent in these departments. Law could prescribe special wings under these departments to file claims on behalf of such departments

Do you think the asset reconstruction companies (ARCs) should be allowed to submit resolution plans under IBC, especially since IBC allows a financial creditor to do so?

The objective of the IBC is to keep entities as a going concern. An entity wishing to buy out an insolvent entity may be apprehensive about the future prospects of the insolvent entity due to which an insolvent entity may not get many buyers. An ARC, on the other hand, with its dedicated team to revive an insolvent entity may act as an intermediary between the erstwhile promoters and a new entity. If an ARC files a resolution plan and gives the insolvent entity an initial boost, the ultimate entity — the new entity may be more confident to buy out the insolvent entity.

There’s a lot of confusion when it comes to the composition of CIRP cost. Many IPs have been penalized for including unrelated costs as CIRP. Do you think Insolvency and Bankruptcy Board of India (IBBI) needs to come out with some clarification on this?

In June 2018, a circular was issued wherein certain classifications were made as to what can and cannot come under CIRP Cost. However, despite the issuance of the 2018 circular, the legal provisions and regulations remain vague enough for professionals and that there is no objectivity. The IBBI has mentioned that reasonable costs be charged but it has taken the stand that what is ‘reasonable’ has to be decided on a case-to-case basis and cannot be defined. Further, in 2019 the IBBI released a discussion paper on the CIRP Cost issue. The paper also includes the orders by the Adjudicating Authorities, wherein the IBBI has been asked to clarify more on the issue of costs. The IBBI in this paper has provided some suggestions so as to help fix the costs but they are again, not objective enough. In my view, either all the costs should be allowed or the IBBI must lay down extremely objective guidelines in terms of CIRP costs, the absence of which will also act as a deterrent in attracting good talent insofar as RPs are concerned.

Recently, the NCLAT observed that Section 65 of the IBC is being frequently used to reject genuine insolvency applications. What are your views on this?

It is true that Section 65 applications have been used as a counterblast to avoid admission of an insolvency petition. In my view, and as the NCLAT also held, an insolvency application that satisfies the requirements of Section 7 and 9 should not be dismissed arbitrarily under the guise of Section 65 of the IBC.

Former National Company Law Appellate Tribunal (NCLAT) chairperson and retired Supreme Court judge Justice S J Mukhopadhaya has been appointed to a 17-member global advisory board of the Gupta Family Group (GFG) alliance. Having presided over cases in which Liberty group was a party, do you think he could have avoided taking that offer?

The question is akin to the question of accepting post retirement government jobs. One can have his own views regarding the same. It is essentially a debate between freedom of choice and professional ethics. Having said that, the law does not prescribe that accepting post-retirement jobs amounts to violation of any ethics, whatsoever.