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Till now, in order to initiate proceedings under the IBC, financial creditors had to provide proof of the corporate debtor's default. Once the adjudicating authority, the National Company Law Tribunal, was convinced of the default, the application was admitted. The introduction of the Insolvency and Bankruptcy Code marked a fundamental change in the relationship between borrowers and lenders. With a creditor-in-control framework, the move to a time-bound resolution process shifted the balance of power away from the corporate borrower. The code was meant to discipline errant borrowers — who till then had been able to game the system — with the threat of losing control. However, delays in the resolution process beyond the timelines prescribed in the code, the large haircuts that creditors have taken, and the disproportionate share of cases that have ended in liquidation, have cast a shadow over the functioning of the code. A recent court judgment is only likely to further complicate matters.
Till now, in order to initiate proceedings under the IBC, financial creditors had to provide proof of the corporate debtor’s default. Once the adjudicating authority, the National Company Law Tribunal, was convinced of the default, the application was admitted. This allowed for quick admission of cases. However, the judgment in Vidarbha Industries Power Ltd. v. Axis Bank appears to have created ambiguity in this process. As per the judgment, the NCLT “has to consider the grounds made out by the corporate debtor against admission, on its own merits.” This creates space for applications by financial creditors to be rejected even if there is a default. If the NCLT is now required to delve into the financial position of the corporate debtor, to inquire if the default is due to cash flow distress and whether it can repay, then matters of commercial considerations, which are the domain of the committee of creditors, are now also being placed with the NCLT. Doing so may also lead to delays in the admission of cases beyond the timelines envisaged.
In large measure, the success of the IBC was in its attempt to transform the credit culture in the country. The threat of losing control over the firms was meant to ensure that borrowers honour their obligations. There are indications of this threat having become a credible deterrence. Till March 2022, 21,000 applications for the initiation of the resolution process were resolved before their admission. However, if the admission of cases itself becomes a matter of discretion, this will impinge on IBC being an effective deterrence for errant borrowers. Considering that delays in either admitting the case or the resolution process will only lead to further destruction of asset values, NCLTs must ensure that the timelines envisaged in the code are strictly adhered to.
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