Deadline or Dead End? Judiciary Tightens the Screws on IBC’s Compliance – IndiaCorpLaw
[Abhishek Pandey and Aditya Mittal are 4th year B.A. LL.B. (Hons.) students at Hidayatullah National Law University, Raipur]
In the corporate insolvency regime, time is everything. The Insolvency and Bankruptcy Code (Code) was introduced in 2016 with a vision to reshape India’s insolvency regime by focusing on swift, time-bound processes that maximize the interests of all stakeholders. While after implementation of the Code, the average time for resolution has come down from 4.3 years to 1.6 yearsits success towards reaching the mark of statutory limit still depends on the stringent implementation of statutory timelines and procedural adherence.
Remarkably, the judicial approach has evolved from a liberal interpretation to stricter enforcement of the Code. Landmark cases such as Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta (the Essar Steel case) initially underscored the importance of timelines and the Code’s constitutional validity, setting the stage for a robust insolvency regime. However, recent judgments, such as Kalyani Transco v. Bhushan Power and Steel Ltd. (the JSWcase) from the Supreme Court & Taguda Pte Ltd. v. State Bank of India (the Rear case) from the NCLAT reflect a marked shift toward uncompromising adherence to compliance. Drawing together, the JSW and Rear rulings reinforce that the courts now regard unwavering adherence to statutory timelines as a pivotal factor in determining the success of insolvency resolution, failing which the company will liquidate.
This blog examines this shift to understand how compliance with timeline and procedure has become a crucial determinant of the resolution process. By following its evolution through landmark judgments, analysing recent JSW and Rear judgments and drawing comparative insights from global insolvency models, the authors aim to highlight the change in approach of the court for the success of resolution and conclude by suggesting reforms to reinforce the Code to make it a strong tool for balancing stakeholder interests and economic stability in India’s changing insolvency regime.
Time as a Core Principle
The time-bound resolution is one of the foundational pillars of the Code, which is enshrined in its preamble and reflected in sections 12 and 31. Section 12 mandates strict timelines for the Corporate Insolvency Resolution Process (CIRP) which shall be carried out within a period of 180 days since the date of admission of the application, which has been upheld by the Supreme Court in the case of Innoventive Industries Ltd. v. ICICI Bank. Also, the Resolution Professional (RP) may approach the Adjudicating Authority (AA) for an extension, yet again on a majority consensus basis of 66% of the Committee of Creditors (CoC), highlighting the importance of creditor’s agreement for any timeline extensions. The AA may extend it one-time by another 90 days depending upon the nature of the case. The whole process, including any extensions and legal proceedings, must compulsorily be completed within 330 days from the start of insolvency.
Section 31 likely aligns with the aim of efficient and expeditious resolution. Particularly, sub-section (4) imposes a mandate on the resolution applicant to procure all due legal approvals required under any law within one year from the date of AA’s confirmation of the resolution plan, emphasising the importance of timely approval in the CIRP. These provisions highlight the Code’s goal towards expedited and timely resolution.
The Shift from Judicial Flexibility to Rigidity
The judiciary’s role in interpreting and shaping the code carries due significance in tackling the practical challenges with the Code’s application. The Apex Court in the landmark judgment of the Essar Steel case opted for a liberal and accommodating approach so far as timelines are concerned by striking down the term “mandatorily” from the proviso of section 12. Upholding the maxim an act of the court of the courtit granted relief only in extraordinary situations such as judicial or unforeseen delays, giving more importance to revival than to liquidation to protect stakeholder’s interests. Similarly, NCLAT in Ritu rastogi v. Riyal packers also granted a minor extension beyond the statutory period to prevent liquidation, showing an effort of the court to find the perfect balance between timeliness of completion and justice, finally in favour of resolution over liquidation, especially when the appellant makes every attempt towards successful resolution.
The judiciary went through a shift in approach from flexible timeline alteration and prioritization of revival over liquidation towards a rigid and stricter approach. In the landmark case of State Bank of India v. The Consortium of Mr. Murari Lal Jalan and Mr. Florian Fritsch (Jet Airways case), the Court invoked article 142 to direct liquidation, as a viable last resort and emphasised for timely resolution, particularly in the sectors where maintaining operational stability and preventing escalating costs hold due importance, in this case being the aviation sector. It was rightly observed that inordinate delays in resolution plan implementation increase costs, burden stakeholders, and undermine the Code’s goal of quick resolution, especially in crucial sector-specific requirements.
Cementing Procedural Rigour: Setting a New Standard
Following a similar approach, the recent JSW case focused on curbing misuse and reinforcing the discipline of the Code’s values. In this case, the Supreme Court invoked article 142 to address egregious delays in the CIRP of Bhushan Power and Steel Ltd. (BPSL), where JSW Steel Limited, the Successful Resolution Applicant (SRA), failed to implement the resolution plan within the statutory 330-day outer limit. This non-compliance was compounded by procedural lapses, causing substantial value destruction with increased CIRP costs, coupled with JSW misusing legal delays to exploit market trends, thereby subverting the goal of timely resolution, which stands vital for the steel sector’s operational stability. Consequently, the Court quashed the resolution plan and ordered liquidation, giving a firm reminder that flagrant violations of the Code’s timelines and procedural requirements would invite serious consequences.
Moving parallelly, NCLAT’s order in the Rear case reinforces the Code’s procedural rigor and timely mandate under section 31(4), requiring resolution applicants to secure regulatory approvals within one year from the plan’s approval, reflecting the procedural rigour observed from cases such as the JSW case. In this case, the SRA, i.e., Taguda Pte Ltd., faltered in implementing the resolution plan within the inviolable one-year timeline stipulated for securing regulatory approvals from the Reserve Bank of India (RBI). The NCLAT held that section 31(4) imposes an absolute duty on the SRA to meet timelines, dismissing excuses of regulatory delays as untenable, even if the delays stemmed from external regulatory bottlenecks, implying that the burden rests ultimately with the SRA. The Court dismissed requests for further extensions, finally leading to the invocation of the Performance Bank Guarantee and a pending liquidation application.
These rulings echo a transformative judicial stance, emphasizing that procedural rigour and timeline adherence are inviolable, with deviations triggering liquidation to deter misuse and uphold the insolvency framework’s integrity. Though the relaxations were intended to bring justice and preserve resolution, the courts should ensure that such relaxations yield positive outcomes and do not lead to liquidation. This shift demands accountability, particularly in high-stakes cases, prioritizing strict compliance to achieve timely adjudication. Exceptions should only be granted under compelling justification and must avoid any squandering efforts that lead to liquidation. This resolute approach ensures swift resolution or prompt liquidation, safeguarding stakeholders and reinforcing the Code’s commitment to economic resilience across industries.
Comparative Insights into Global Insolvency Models
Insolvency regimes in the United States (US), United Kingdom (UK) and Singapore offer different yet effectiveresolution strategies. The Debtor in Control (DIC) regime under Chapter 11 of the United States Bankruptcy Code offers the debtors one lockout period of 120 days which can be extended only up to 18 months, during which time they have to file a restructuring proposal. The UK and Singapore have the Creditor in Control (CIC) model, where administrations under the Insolvency Act 1986 of the UK have a strict tenure of 12 months, which gets extendable only by creditor’s vote or court order on production of evidence of a viable rescue plan. Interestingly, US and UK both take an average of 1 year to resolve cases, while Singapore resolves cases in a consistent average time of 8 months. India’s framework, which is in line with UK’s insolvency framework and aligned along principles of CIC, has shown considerable improvements.
Way Forward: Strengthening the Code for Timely Resolution
The Code has remained a cornerstone of India’s economic pillar, driving the insolvency regime. However, operational flaws like delay, procedural ineffectiveness, and misuse undermine its effectiveness, necessitating long overdue reforms. With the resolution periods grossly exceeding the legislated 330-day time limit, recovery rates stuck in the range of 25–30%, and asset value being lost owing to delay and frivolous appeals, according to the Standing Committeesystemic reforms might be needed. The court’s movement towards a rigid and firm interpretation of the implementation of the Code reflects the understanding that compliance is non-negotiable. We identify some possible reforms below.
Firstlydeveloping a comprehensive set of sectoral guidelines for insolvency resolutions exceeding specified thresholds would be helpful. These could be established by the Insolvency and Bankruptcy Board of India (IBBI) in consultation with the help of expert advisory committees. These guidelines will provide a standardized framework for an analysis of economic and market effects such as, recovery rate, employment effect, market stability to guide RPs and the CoC in execution of CIRP. In addition, the fast-track NCLT mechanism will check any relaxation requests according to these guidelines and ensure efficient resolution of the entity.
Secondly, several critics have observed in the JSW case, that, instead of putting the company into liquidation, proceedings against the concerned defaulters could be a better alternative for the revival of the company rather than pushing the company to liquidation. Therefore, accountability should target individual defaulters for wilful non-compliance of the Code as this would open a possibility of the revival of the entity and would ultimately protect stakeholders like creditors and employee’s interests from bearing the brunt of managerial lapses.
Lastlythe NCLT faces a bottleneck with its members being overworked by loads of cases, ultimately leading to prolonged admission delays. Therefore, expanding the number of benches, improving existing infrastructure, and appointing specialized insolvency-trained members, as mentioned by the NCLT Chairmanwill hopefully expedite case disposal, reduce backlog, and ensure swift admission of claims.
This shift in the approach adopted by the courts to strengthen the effectiveness of the Code, as seen in the JSW and Rear cases, is a constructive step underscoring the importance of strictly adhering to the Code’s timelines and procedures. However, in cases involving crucial sectors or touching substantial economic interests, a balanced and dynamic approach should be opted. Through the exercise of reasonable discretion to balance the interests, the courts may preserve economic value without jeopardizing the Code’s core principles. Ultimately, this thoughtful balance of strict enforcement and commercial practicality not only aligns with the judiciary’s constructive approach, but also ensures that the framework remains a viable instrument of economic recovery while remaining faithful to its aim of fairness and efficiency.
– Abhishek Pandey & Aditya Mittal