Analysis of Timelines under The Insolvency & Bankruptcy Code, 2016

Introduction

One of the aims of insolvency law is to maximize the value of the assets of the corporate debtor. Value is usually dependent on the time taken to resolve the insolvency, since it erodes over time, and rapidly once formal insolvency proceedings commence. There are concerns that delays may make reorganization impossible, and may induce liquidation, causing value destruction. Further, even in liquidation, delays lower recoveries.

“Where the insolvency regime facilitates a restructuring based on negotiations with creditors, the concern is that delaying tactics will extend the time set for negotiations at the start”.[1] Another source of delay could lie in adjudicatory mechanisms, and delay in passing orders relevant to the resolution of insolvency.

In the Indian landscape, this becomes particularly pertinent due to the experience under the “Sick Industrial Companies Act, 1985”[2]. Accordingly, it is relevant to analyse the jurisprudence and provisions of the Code that are aimed at improving the timeliness of proceedings under the Code.

Analysis & Interpretation

The Preamble of the Insolvency & Bankruptcy Code states that it is

“An Act to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner…”

To enable this, detailed timelines have been prescribed in the Code.

At the stage of admission of an application for initiating insolvency proceedings, the Code provides 14 days time to the NCLT to make a decision regarding admission or rejection. Before rejecting an application, the NCLT is required to provide 7 days’ time to the applicant to rectify defects, if any, in the application. There was a lack of clarity on whether this was mandatory or directory.

JK Jute Mills Company Ltd. v. M/s Surendra Trading Company[3]

In this case, the NCLAT held that time is of the essence under the Code, which requires the NCLT and all stakeholders to perform within the time limits prescribed except in exceptional circumstances. However, the NCLAT held that the 14 days timeline is a directive, and the NCLT has inherent powers to extend the 14-day period on a case-to-case basis in the interest of fairness and justice. It further observed that the 7 days time period provided for rectification of defects would have to be mandatorily complied with and no concession could be granted in this regard.

On appeal, the Supreme Court confirmed the conclusion that the fourteen-day period would be directory and also set aside part of this order by holding that the 7 days period would also be directory in nature, given that “it is a well-settled principle of law that where a statutory functionary is asked to perform a statutory duty within the time prescribed therefor, the same would-be directory and not mandatory.”[4]

NOTE

Apart from the timeline given for the admission of cases. “Section 12”[5] of the Code also provides a strict timeline for the completion of the entire resolution process.[After the expiry of 180 days or 270 days as the case may be, in the event a resolution plan has not been submitted, or if submitted, and rejected under “section 31”[6] of the Code or even after the dismissal of an appeal filed under “section 61”[7] contesting rejection of a plan, the Code directs that the debtor initiates a liquidation process].[8]

The time period prescribed by the Code is the maximum time provided for the completion. There may be instances, where a resolution process can be completed before the maximum time period prescribed.

Prowess International Pvt. Ltd. v. Parker Hannifin India Pvt. Ltd[9]

In this case, the NCLAT observed that “thereafter, in case(s) where all creditors have been satisfied and there is no default with any other creditor, the formality of submission of the resolution plan under “Section 30”[10] or its approval under section 31 is required to be expedited on the basis of the plan if prepared.

In such case, the Adjudicating Authority without waiting for 180 days of the resolution process, may approve the resolution plan under section 31, after recording its satisfaction that all creditors have been paid/ satisfied and any other creditor do not claim any amount in absence of default and required to close the Insolvency Resolution Process. On the other hand, in case the Adjudicating Authority does not approve the resolution plan, will proceed in accordance with the law.”

RBL Bank Limited. v. MBL Infrastructure Limited[11]

In this case, the Kolkata Bench of the NCLT observed that “it appears to us that even in a case if we are satisfied that grave injustice would occur if a prayer for an extension for no fault of the applicant occurs the Adjudicating Authority can extend the time limit provided under section 12 of the Code.

However, we are not asked to extend the time limit as provided under section 12 of the Code but to exclude the period due to litigation. So, we are not holding that we can extend the period of CIRP as prescribed under section 12 of the Code.” Where the whole period of 180 days passes and the Adjudicating Authority is satisfied that the process cannot be completed during the given time period, it may extend the period by up to 90 days.

While the Code states that no further extension may be given after this period, there was a concern that this maximum timeline may also be extended by courts.

ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta[12]

However, the Supreme Court in unequivocally held that the entire time period within which the corporate insolvency resolution process ought to be completed is strictly mandatory in nature, and cannot be extended. It relied on the primary objective of the Code, which is to ensure a timely resolution process for a corporate debtor, and principles of statutory interpretation to hold that the literal language of section 12 mandates strict adherence to the time frame it lays down.

To enable this adherence to the outer time limit provided in the Code, the court also held that the model timeline provided in Regulation 40A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 should be followed “as closely as possible”.

NOTE

It is relevant to note, however, that while the statutory outer time limit cannot be extended, this does not apply to the internal timelines for the processes set by the committee of creditors, as long as those are within the statutory outer time limit.

Tata Steel Limited v. Liberty House[13]

In this case, the Appellate Tribunal on going through the clauses of the ‘Process Document’, held that the Committee of Creditors has the discretion to update, amend, modify, supplement, add, delay, cease or annul the resolution process at any time and “the ‘Resolution Professional’ in consultation with the ‘Committee of Creditors’ can extend the timelines at its sole discretion if expedient for obtaining the best ‘Resolution Plan’ for the Company.

Therefore, granting more opportunity to all the eligible ‘Resolution Applicants’ to revise their ‘financial offers’, even by giving more opportunity, is permissible in the Law. However, all such processes should complete within the time frame.”

NOTE

Even where the statutory outer time limit cannot be extended, questions arise as to whether certain periods can be excluded from the calculation of the maximum time.

Quinn Logistics v. Mack Soft Tech[14]

The NCLAT in this case gave an illustrative list of the time gaps that may be excluded:

“From the decisions aforesaid, it is clear that if an application is filed by the ‘Resolution Professional’ or the ‘Committee of Creditors’ or ‘any aggrieved person’ for justified reasons, it is always open to the Adjudicating Authority/Appellate Tribunal to ‘exclude certain period’ for the purpose of counting the total period of 270 days, if the facts and circumstances justify exclusion, in unforeseen circumstances.

For example, for following good grounds and unforeseen circumstances, the intervening period can be excluded for counting the total period of 270 days of the resolution process: –

1. If the corporate insolvency resolution process is stayed by a court of law or the Adjudicating Authority or the Appellate Tribunal or the Hon’ble Supreme Court.
2. If no ‘Resolution Professional’ is functioning for one or other reason during the corporate insolvency resolution process, such as removal.
3. The period between the date of the order of admission/moratorium passed and the actual date on which the ‘Resolution Professional’ takes charge of completing the corporate insolvency resolution process.
4. On hearing a case, if the order is reserved by the Adjudicating Authority or the Appellate Tribunal or the Hon’ble Supreme Court and finally pass an order enabling the ‘Resolution Professional’ to complete the corporate insolvency resolution process.
5. If the corporate insolvency resolution process is set aside by the Appellate Tribunal or the order of the Appellate Tribunal is reversed by the Hon’ble Supreme Court and the corporate insolvency resolution process is restored.
6. Any other circumstances which justify the exclusion of a certain period. However, after exclusion of the period, if the further period is allowed the total number of days cannot exceed 270 days which is the maximum time limit prescribed under the Code.”

Velamur Varadan Anand v. Union Bank of India & Anr.[15]

The NCLAT in this case allowed the exclusion of time from the calculation of the maximum time limit since the resolution professional had not taken charge for almost thirty days.

ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta[16]

The Supreme Court in this case specifically dealt with the issue of whether the time taken in litigation could be excluded from the outer time limit provided in the Code and held that it could. The court opined that “A reasonable and balanced construction of this statute would therefore lead to the result that, where a resolution plan is upheld by the Appellate Authority, either by way of allowing or dismissing an appeal before it, the period of time taken in a litigation ought to be excluded. This is not to say that the NCLT and NCLAT will be tardy in decision-making.

This is only to say that in the event of the NCLT, the NCLAT, or this Court taking time to decide an application beyond the period of 270 days, the time taken in legal proceedings to decide the matter cannot possibly be excluded, as otherwise, a good resolution plan may have to be shelved, resulting in corporate death, and the consequent displacement of employees and workers.”

The Court did not deal with the issue of exclusions due to the other reasons mentioned in Quinn Case.

Ajay Agarwal v. AML Steel & Power Ltd[17]

In this case, an appeal was made against the impugned order of the Adjudicating Authority allowing the exclusion of 90 days from the corporate insolvency resolution period on the ground that company premises were located in a Naxalite-infested area because of which the Resolution Profession was finding it difficult to visit the premises without police assistance. The NCLAT upheld the impugned order stating that the order is in tune with the position laid down in Quinn Industries regarding the grounds that warrant the exclusion of time from the corporate insolvency resolution process.

Conclusion

The Code stipulates fixed timelines to ensure timely resolution for corporate debtors, for the benefit of all stakeholders. Judicial interpretation has, by and large, promoted this objective by mandating that various parts of the timeline be adhered to and mandating that the outer time limit provided in section 12 cannot be extended. However, certain time periods may be excluded from the calculation of the total time periods for the insolvency resolution process, including time taken in litigation.

[1] Bankruptcy Law Reform Committee, Report of the Bankruptcy Law Reform Committee, Vol. 1 (2015).

[2] Sick Industrial Companies Act 1985, Legislative Department https://legislative.gov.in/sites/default/files/A1986-1.pdf (Visited on July 30, 08:56 PM).

[3] JK Jute Mills Company Ltd. v. M/s Surendra Trading Company, Company Appeal (AT) No. 09 of 2017. Decision date- 01.05.2017 (India).

[4] Surendra Trading Company v. JK Jute Mills Company Limited &Ors., Civil Appeal No. 8400 of 2017. Decision date- 19.09.2017 (India).

[5] Time-Limit for Completion of Insolvency Resolution Process, Insolvency & Bankruptcy Code 2016.

[6] Approval of Resolution Plan, Insolvency & Bankruptcy Code 2016.

[7] Appeals and Appellate Authority, Insolvency & Bankruptcy Code 2016.

[8] Section 33, Initiation of Liquidation, Insolvency & Bankruptcy Code 2016.

[9] Prowess International Pvt. Ltd. v. Parker Hannifin India Pvt. Ltd., Company Appeal (AT) (Insol.) No. 89 of 2017. Decision date- 18.08.2017 (India).

[10] Submission of Resolution Plan, Insolvency & bankruptcy Code 2016.

[11] RBL Bank Limited. v. MBL Infrastructure Limited, CA (IB) Nos. 238, 270 & 288/KB/2018 in CP (IB) No. 170/KB/2017. Decision date- 18.04.2018 (India).

[12] ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta &Ors., C.A. Nos. 9402-9405 of 2017. Decision date 04.10.2018 (India).

[13] Tata Steel Limited v. Liberty House Group Pte. Ltd., Company Appeal (AT) (Insolvency) No. 198 of 2018. Decision date- 04.02.2019 (India).

[14] Quinn Logistics India Pvt. Ltd. v. Mack Soft Tech Pvt. Ltd., Company Appeal (AT) (Insolvency) No. 185 of 2018. Decision Date- 08.05.2018 (India).

[15] Velamur Varadan Anand v. Union Bank of India & Anr., Company Appeal (AT) (Insolvency) No. 161 of 2018. Decision Date- 16.05.2018 (India).

[16] ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta &Ors., C.A. Nos. 9402-9405 of 2017. Decision date 04.10.2018 (India).

[17] Ajay Agarwal v. Shantanu T. Ray, RP of AML Steel and Power Ltd. & Ors., Company Appeal (AT) (Insolvency) No. 61of 2019. Decision date- 18.01.2019 (India).

This article has been written by Aryan Sihna, who is a student at Galgotias University.