- Vinay Kella
LEGISLATIVE PASSIVITY AFFECTING PERSONAL INSOLVENCY
“We have also witnessed great interest in the revival of insolvent companies, and liquidation is gradually being seen, and rightly so, as the very last resort. All in all, the law proves that destruction can be creative and for the larger good.”
These words emphasised by Justice Nariman adequately explain the importance and objective with which the Insolvency and Bankruptcy Code (“IBC”) was enacted. The present article analyses how the time-bound mechanism of IBC is getting negatively impacted due to the legislative inaction in relation to the jurisdiction for insolvency of personal guarantors under the IBC. The article first explains the background and intention for the IBC's enactment, the jurisdictional issue involving personal guarantors under the IBC, the consequences of legislative inaction in this regard and lastly offers a conclusion.
The jurisdictional conflict between the DRT and the IBC
In 1994, the Indian Government established the Debt Recovery Tribunal (“DRT”) under the Recovery of Debts due to the Banks and Financial Institutions Act, 1993 (“RDDBFI Act”), which gave the banks and other financial institutions an avenue to recover the collateral in the event of default through the DRTs. However, DRT miserably failed in its purpose as noted by the Bankruptcy Law Reforms Committee (“BLRC”), as the loan recovery rate was the lowest in the world, and moreover only 20% of the value of the debt was able to be recovered.
In 2016, the IBC was enacted with the aim of consolidating and amending the laws governing the reorganization and insolvency resolution of various entities in India. It offers a time-bound procedure to resolve insolvency, in order to provide the maximum value for all the assets to all the stakeholders, who are involved in resolving the insolvency of the company. Part III of the IBC deals with the insolvency of individuals and partnership firms insofar as it is applicable to personal guarantors (who furnished personal guarantees in favour of the Corporate Debtor).
The jurisdiction and authority regarding the adjudication of personal guarantors in the new IBC regime are interdependent and governed by Section 179 and Section 60 of the IBC. Section 179 of the IBC bestows the DRT with the jurisdiction to hear cases involving insolvency of the personal guarantors, but it also limits the jurisdiction as it starts with “subject to Section 60(2) of the IBC”. This eventually gives the power to NCLT as Section 60(2) of the IBC states that any recovery actions brought in any court or tribunal initiated against individuals who are personal guarantors of corporate debtors undergoing CIRP will be transferred to the NCLT.
Various judicial precedents follow a similar line of interpretation, as seen in the case of SBI Stressed Assets Management Branch v. Mahendra Kumar Jajodia. Even if no action is currently pending against the corporate debtor, NCLAT noted that Section 60(2) of the IBC does not in any way prohibit the filing of insolvency proceedings against the personal guarantor, and in such a situation, an application can be filed by relying on Section 60(1) of the IBC. Further, the intention of Section 60(2), as explained by NCLAT is to prevent two separate NCLT benches from hearing the insolvency proceedings of the corporate debtor and its personal guarantor where the corporate debtor is already the subject of ongoing bankruptcy or liquidation proceedings. Moreover, the Hon'ble Supreme Court has dismissed the appeal filed against this judgment of NCLAT and stated that "We do not see any cogent reason to entertain the Appeals. The judgment does not warrant any interference".
Further, Section 60(3) of IBC states that any insolvency or bankruptcy proceeding of a personal guarantor of the corporate debtor shall stand transferred from any court or tribunal to the Adjudicating Authority dealing with the proceeding of such corporate debtor. Thus, it can logically be concluded from the above discussion that the jurisdiction of DRT has been diminished in the new IBC regime and the NCLT is the adjudicating authority that has been vested with the power to deal with the insolvency proceedings, as proceedings once initiated against corporate debtor shall stand transferred to NCLT.
It is pertinent to note that Section 60(3) provides that the transfer shall take place to NCLT, but the provision does not lay down the procedure governing the transfer to NCLT. The main issue arises now, as there is no rule/guidelines/procedure enacted either by the Ministry of Finance (governing DRT) or Ministry of Corporate Affairs (governing IBC) to govern the said transfer of cases from the DRT to NCLT, due to the non-intervention on the part of the Legislative or Executive body. It means that the procedure governing such transfer from DRT to NCLT is essentially absent. As a result, various cases are still there in the DRT (despite the fact that the role of DRT has been diminished) and not transferred to the NCLT, which is also evident from the data released by the IBBI in the January-March 2022 issue of “Insolvency and Bankruptcy news”, where it can be seen that 18 cases are still pending in DRT under Section 94 and 95 of the IBC pertaining to the insolvency of the personal guarantor to corporate debtors as the provisions of the IBC dealing with insolvency of individuals other than the 'personal guarantor to corporate debtors' has not brought into effect.
The BLRC report in 2015 had recommended that- “The Central Government must issue procedural rules governing the proceedings before the NCLT and the DRT…Ideally, with time, these practice directions should be incorporated into the rules to make the rules more comprehensive and detailed…” Neglecting the recommendations of the Committee is a sign of the Legislature's inactivity, as the Legislature has not taken proactive steps to deal with this procedural aspect governing personal insolvency.
Consequences of legislative inaction
The consequences of this legislative inaction is manifold. Firstly, the importance of procedural law in a judicial system is being forsaken, despite procedural law being as important as substantive law. Rule of law, which is the cornerstone of any democratic polity also gets infringed if the procedural aspect is neglected, as held in the case of Rajeev Suri v. Delhi Development Authority and Ors. The aim with which the IBC was enacted cannot be achieved in absence of adequate procedures laid down in the system. In the absence of rules or procedures, this creates two authorities for adjudicating personal insolvency cases.
Furthermore, this loophole could be exploited as the insolvency proceedings could be stayed by the DRT pursuant to which proceedings cannot be continued in NCLT, as there is no procedure for transfer of proceedings and to further cease the proceedings in NCLT, the person can approach the High Court under Article 226 as the earlier stay was granted by a competent authority (DRT). This would ultimately delay the whole insolvency proceedings and would be against the time bound manner prescribed under the IBC. Consequently, this also disincentivises the prospective resolution applicants from enforcing their claims under the IBC, as the whole process is embroiled under litigation.
Secondly, this infructuous delay in proceedings under the IBC will ultimately invalidate the aim of IBC, with which it was enacted, and we would be heading to a similar situation as earlier faced during the DRT regime. The data from the Insolvency and Bankruptcy Board of India (IBBI) pertaining to Quarter 4 of FY22, in which the amount to be realised from the resolution process was for the first time lower in than the asset's liquidation value, proclaims that the aim with which the IBC was enacted is already in crisis.
Further, such inaction on the part of legislature unnecessarily burdens the existing infrastructure, which is already taking an average of nearly 700 days to finish a resolution process compared to the 330 days that were allotted. Moreover, the recovery ratio for creditors has reached its lowest level ever, underlining the difficulties that lenders are facing as bidders become cautious owing to an uncertain economic environment while court approvals have slowed down.
The IBC is not a mere debt recovery procedure and the aim of resolving the insolvency in a time bound manner must not be defeated on the account of legislative inertia, as the same is delaying the proceedings under the IBC. The lack of proactive deliberation by the government could be an impediment to the time-bound proceedings and stands in direct contravention to the intention with which the IBC was enacted. As a result, the author believes that a careful consideration of the procedure supplementing the provisions under the IBC can be proactively enacted by the legislature in furtherance to the aim of the IBC, rather than continuing to deal with such issues in a piecemeal fashion.