Guidelines for NCLT to deal with bankruptcy cases in the works

The government is planning to draft rules for the National Company Law Tribunal (NCLT) to deal with Insolvency and Bankruptcy (IBC) cases, according to official sources.

The Ministry of Corporate Affairs (MCA) is also looking to fill all vacant posts at various NCLT Benches by August and put in place an IT-enabled system that would use artificial intelligence (AI) for case management.

The NCLT, adjudicating authority for matters related to company affairs, was constituted before the IBC came into effect.

“The adjudicating authority has rules for closing down companies which is a Companies Act matter, but the IBC is a very different law,” a senior government official said.

The rules under consideration would work as guidelines for the tribunal. For instance, NCLTs could be directed to penalise frivolous applications that end up delaying the corporate insolvency resolution process.

Also, there could be a priority list to ensure certain matters are expedited.

IBC lawyers often rue that the NCLT is a weak link in the IBC due to lack of manpower, infrastructure, and domain expertise.

Since its inception in June 2016, the NCLT has never worked at full capacity, for instance.

To fix this, the government is looking at adopting a two-pronged approach.

While filling up the 22 vacant posts across various benches of the tribunal by August is on the cards, the MCA is planning to start an IT-enabled case management system for IBC cases.

For instance, in cases with the tribunal in which a resolution professional has to be appointed, AI will select and appoint the RP from a list of registered professionals with the Insolvency and Bankruptcy Board of India (IBBI).

Officials also said the dependence of judges on junior staffers for information about the law, among other things, shall also be reduced with the use of the IT-enabled system.

In the IBC itself, the ministry is planning to introduce an enabling provision to allow the use of IT systems, for sending notices via e-mail for instance.

Law firm Alvarez and Marshal, in its paper titled ‘The Next Phase of the IBC Must Focus on Efficiency’, noted there was lack of transparency at the registry level in terms of sequential listing of petitions at NCLT benches which, at times, requires multiple follow-ups.

This is primarily due to lack of any digital mode.

“The burden of excessive documentation and procedures has clogged the movement of cases in the NCLT.

"Streamlining of procedures across the NCLT with respect to filing, elimination of unwanted administrative steps, and shifting the process to e-mode or digital as adopted during Covid will help decongest case workload,” said Abhilash Lal, insolvency professional.

Between November 2017 and August 2022, the NCLT dealt with 31,203 cases for initiation of insolvency, of which 7,175 were pending in the pre-admission stage and 3,369 were pending after admission, according to the data provided by the tribunal.

Admission of cases in the NCLT has been one of the biggest bottlenecks in current insolvency proceedings, since it takes several months to admit an application in most cases, despite 14 days envisaged in the Code.

To address this, the MCA has proposed mandatory admission of applications filed by financial creditors, once the tribunal is satisfied with the occurrence of default.

The MCA is also proposing that information regarding the occurrence of a default or dispute may be ascertained at information utility (IU), which can be relied on for speedy default verification.

The MCA’s consultation paper on IBC amendments has proposed bringing a provision where the IBC is being initiated by financial or operational creditors, the adjudicating authority should rely only on records available with IUs.