National Company Law Tribunal’s (NCLT’s) Role in Corporate Restructuring: A Comprehensive Analysis

4th January, 2024 - 7:25 am Categories: Company Law IBC NCLT 0 Comments

Introduction

Established under the Companies Act of 2013, the National Company Law Tribunal is a quasi-judicial body that renders decisions on issues pertaining to Indian corporations. In accordance with the 2016 Insolvency and Bankruptcy Code, the National Company Law Tribunal is tasked with adjudicating matters corresponding to the insolvency resolution process, corporate reconstruction, and limited liability partnership cases. The National Company Law Tribunal (NCLT) plays a crucial role in India’s corporate restructuring by facilitating the resolution of corporate disputes and insolvency processes.[1] It ensures effective and timely decisions through its established process along with fair and unbiased decision-making and encourages effective management of corporations.

The NCLT’s emphasis on prompt resolution, which guarantees expeditious handling of cases, is crucial for the Indian judiciary, given its overwhelming load of exhausting legal proceedings. The role of the National Company Law Tribunal (NCLT) in corporate restructuring involves strengthening corporate governance in India to ensure companies’ compliance with legal and ethical norms, advocating for and safeguarding the interests of stakeholders, and improving the overall efficacy of corporate resolution in cases of mismanagement or oppression.[2]

Nclt’s Legal Framework For Corporate Restructuring

In the words of Justice Dhananjaya Y. Chandrachud, “Corporate restructuring is one of the means that can be employed to meet the challenges which confront business.”Corporate restructuring refers to the strategic process of reconfiguring a company’s numerous aspects, such as its business model, managerial organization, or financial framework, intending to address challenges and enhance the company’s value. There are several ways to restructure a company, including mergers, demergers, reverse mergers, takeovers, joint ventures, and disinvestment. These methods of restructuring can be implemented through different legal frameworks outlined primarily in the Insolvency and Bankruptcy Code of 2016, The Companies Act of 2013, and the SARFAESI Act. Chapter II of the 2016 Insolvency and Bankruptcy Code pertains to the Corporate Insolvency Resolution Process for defaulting companies. In the event of a default by a corporate debtor, the process may be initiated by the corporate debtor, a financial creditor, an operational creditor, or the corporate debtor.  Additionally, corporations may restructure their assets and liabilities in accordance with a scheme of arrangement as stipulated in the Companies Act of 2013. Thirdly, the implementation of debt restructuring by RBI-regulated institutions for companies that have fallen behind on their obligations for a duration of 30 to 60 days. Lastly, Recovery against a delinquent company through statutory mechanisms authorized by the SARFAESI Act.

Resolution under IBC, 2016

In accordance with IBC, a corporate debtor (including any financial creditor, operational creditor, or the defaulting company itself) may initiate the CIRP procedure before the NCLT in the event concerning default. The commencement of the CIRP procedure occurs with the submission of a resolution application, which is subsequently accepted by the NCLT. During the course of the proceedings, an interim resolution professional (IRP) is appointed, which leads to the subsequent suspension of the board of directors. A resolution professional undertakes the responsibility of overseeing the continuous operations of the corporate debtor during the CIRP. Resolution professional invites claims and potential resolution plans from applicants, in addition to creating a Committee of Creditors (COC). The resolution plan must be ratified by a majority of the financial creditors’ voting shares, which constitutes 66% of the total.To commence the CIRP procedure, the entire procedure must be concluded within 180 days starting from the date the application was accepted. If the NCLT does not receive an approved resolution plan before the expiration of the CIRP period, or if the NCLT rejects the resolution plan, it will order the liquidation of the corporate debtor.[3]To conclude, CIRPis one of the most efficient modes of restructuring and revival of the company.

Scheme of arrangement during liquidation under the Companies Act, 2013

Reorganizing the company’s share capital through the consolidation of shares of different classes, the division of shares into shares of different classes, or both, may constitute an arrangement.  A scheme of arrangement, as defined in Section 230 of the Companies Act 2013, may be proposed by the liquidator of a company undergoing liquidation.[4] The liquidator can file an application before the National Company Law Tribunal (NCLT) for authorization of the proposed arrangement. A creditor, a member, or the liquidator can propose a scheme of arrangement under section 230 of the Companies Act 2013.[5] However, as per the recent ruling,[6]any creditor or member who is ineligible under section 29A is not qualified enough to propose a scheme under section 230 of the Companies Act 2013. For the compromise or arrangement to be legally enforceable against the company, three-quarters of the creditors who are obligated to vote must consent to the resolution through any means possible.

RBI Restructuring Scheme

A prudential framework for stressed assets was issued by the Reserve Bank of India via a circular dated 7 June 2019. This framework applies to Small Finance Banks, Scheduled Commercial Banks, All India Term Financial Institutions, and Systemically Important Non-deposit-taking Non-Banking Financial Companies (NBFC-ND-SI) and Deposit-taking NBFCs. It establishes a structure for the timely identification, reporting, and resolution of stressed assets. Lending institutions are required to evaluate a default within 30 days of its occurrence and implement a resolution plan within 180 days, as specified in the circular. Its primary objective is to commence the resolution procedure before the notification of a default.

Recovery through Statutory Mechanism

The SARFAESI Act of 2002 permits financial institutions and banks to liquidate debt through the auctioning of commercial or residential properties. Additionally, it permits the possession of securities pledged as collateral for loans and their subsequent auctioning for the purpose of recovering Non-Performing Assets (NPAs). This process primarily employs three techniques: securitization, asset reconstruction, and enforcement of security without court intervention.

Judgments In Corporate Restructuring

In the case of Innoventive Industries Ltd. Vs. ICICI Bank and Ors[7], the apex court stated the very objective of IBC, 2016;

[Image Sources: Shutterstock]

“The objective of the Insolvency and Bankruptcy Code, 2016 is to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the priority of payment of government dues and to establish an Insolvency and Bankruptcy Fund, and matters connected therewith or incidental thereto. An effective legal framework for timely resolution of insolvency and bankruptcy would support development of credit markets and encourage entrepreneurship. It would also improve Ease of Doing Business, and facilitate more investments leading to higher economic growth and development.”

In the year 2021, The Supreme Court in the case of Gujarat Urja Vikas Nigam Limited Vs. Amit Gupta and Ors.[8]held;

“Where such clauses are invoked when the debtor is merely negotiating a restructuring plan or requesting a stay of individual enforcement actions or invoked in connection with any event connected with the stay, early termination can have a negative impact on the debtor’s business and the successful rescue of the business. Therefore, in such cases, it is necessary to provide that creditors are not allowed to invoke ipso facto clauses which make reference to negotiations on a restructuring plan or a stay or any similar event connected to the stay.Early termination can endanger the ability of a business to continue operating during restructuring negotiations, especially when contracts for essential supplies such as gas, electricity, water, telecommunication and card payment services are concerned.”

The NCLAT in Jitender Arora, Resolution Professional of M/s. Premia Projects Ltd v. Tek Chand[9] held that;

“assets that are transferred to or from the corporate debtor and that are germane to the CIRP of the corporate debtor, even if held by another company, should be included in the information memorandum as well as the CIRP of the corporate debtor.” The NCLAT further observed that “the subsidiary’s assets cannot be included in the CIRP of the corporate debtor given that the subsidiary is not undergoing CIRP. The matter was remanded to the NCLT with the direction that an admission application for the subsidiary company should be considered.”

The apex court in Pratap Technocrats (P) Ltd. and Ors. Vs. Monitoring Committee of Reliance Infratel Limited and Ors[10]held;

“The CIRP must be just, fair and equitable to all stakeholders, and cannot place the interest of the financial creditors at a higher pedestal at the cost of other stakeholders in order to have a smooth corporate restructuring process.”

Nclt’s Process To Approve A Resolution Plans

The process from submission of a resolution plan to approval by the NCLT includes:

1. Submission of a Resolution Plan and appraisal of the RP by the Resolution professional.

As per Section 30 of IBC 2016, submission of the resolution plan should be made to resolution professionals, who shall examine various prerequisites required for a plan to be called an RP.

2. Placement of the Resolution plan before the CoC for approval

Subsequently, the CoC evaluates the resolution plans that meet the requirements outlined in Section 30(2) of the Code in tandem with Regulations 37 to 39 of the CIRP Regulations.

3. Voting by CoC

According to Regulation 39(3B) of the CIRP Regulations, if multiple resolution plans are voted on at the same time, the plan with the highest number of votes, as long as it is at least 66%, is considered approved. However, if multiple resolution proposals receive an equal number of votes, but fewer than 66%, the Committee of Creditors (CoC) must select and accept one of them using the tie-breaker mechanism that was stated before the voting.[11]

4. Approval of a Resolution plan by the CoC

It has been affirmed by the Honourable Supreme Court in Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta and Ors.[12] and reiterated in K. Sashidhar vs. Indian Overseas Bank and Ors.[13] that the determination of whether or not to rehabilitate the corporate debtor through acceptance of a specific resolution plan is entirely within the jurisdiction of the CoC’s commercial prudence.

5. Approval of Resolution plan by NCLT

The NCLT approves the plan solely upon the fulfilment of the stipulations outlined in section 30(2). The resolution plan that has been approved possesses legally binding force over the following parties: the corporate debtor, its members, employees, creditors, guarantors, stakeholders, the Central and State Governments, and any other local authority that owes money on account of obligations due under any applicable law at the time.

Challenges Faced By Ncltin Corporate Restructuring

1.Delays

Delays and backlogs of cases are an inherent aspect of the Indian justice system, and the National Company Law Tribunal (NCLT) is not exempt from this. Despite the fact that the Insolvency and Bankruptcy Code (IBC) mandates a 14-day time frame for the admission of applications by the National Company Law Tribunal (NCLT), parties involved in the process still cause unnecessary delays. Furthermore, the corporate debtor requests adjournments to negotiate a settlement with the creditors, which is successfully achieved, resulting in the withdrawal of the application. However, after a few scheduled payments, the corporate debtor once again fails to meet its financial obligations, compelling the creditors to seek the reinstatement of the debt.

2.Legal complexities and interpretations

The Insolvency and Bankruptcy Code (IBC) of 2016 has undergone six amendments (till now) and numerous precedents have been established to interpret the code and resolve ambiguous regions. There are unresolved queries in the code that give rise to legal complications and subtleties. The code necessitates ongoing legal examination, judicial analysis, and possible legislative modifications.

3.Stakeholder conflicts and resolutions

Conflicts and resolutions among stakeholders pose significant obstacles in the process of corporate restructuring. It frequently occurs as a result of differing priorities, conflicting interests, and occasionally the intricacy of the settlement process.For example;

1.  Constant disagreements over the distribution priority in the water mechanism lead to conflict.
2. The process of making decisions within the Committee of Creditors.

Conclusion

To conclude, NCLT has a crucial function in the broader context of corporate restructuring. It guarantees a just and transparent environment and effective restructuring processes through its extensive authority. It ensures the protection of creditors’ interests and the well-being of other stakeholders, while also fostering a robust system of corporate governance. The National Company Law Tribunal (NCLT), by ensuring stability and accountability, recovers insolvent or bankrupt corporations and facilitates their resurrection in the economy.

Author: SADHIKA, in case of any queries please contact/write back to us via email chhavi@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney.

References

6. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3310189
7. https://www.lexology.com/library/detail.aspx?g=5ee68163-e123-40c6-b9a6-09494b91f1f9
8. https://www.mondaq.com/india/insolvencybankruptcyre-structuring/1317604/restructuring–insolvency-comparative-guide#:~:text=The%20role%20of%20the%20NCLT,Insolvency%20and%20Bankruptcy%20Code%3B%20and
9. https://www.mca.gov.in/Ministry/pdf/TheInsolvencyandBankruptcyofIndia.pdf
10. https://samistilegal.in/scheme-of-arrangement-during-liquidation-under-companies-act-2013/
11. https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf
12. https://vinodkothari.com/2019/11/schemes-under-section-230-with-a-pinch-of-section-29a/
13. https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11580
14. https://www.livelaw.in/law-firms/law-firm-articles-/cirp-resolution-plan-nclt-zeus-law-associates-evaluation-matrix-232466?infinitescroll=1

[1]Kachan Yadav, Dr. Sanjay Guha, The Regulatory Framework of Corporate Restructuring in India: Implications and emerging issues, Social Science Research Network (January, 16, 2019) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3310189.

[2]Aniruddha Sen, Karishma Dodeja Sakshi Singh, A general introduction to the restructuring and insolvency legal framework in India,Lexology, (December 16, 2023), https://www.lexology.com/library/detail.aspx?g=5ee68163-e123-40c6-b9a6-09494b91f1f9.

[3]Mustafa Motiwala  Ashmi Mohan  Sidhant Pandita  Vatsala Pandey, India: Restructuring & Insolvency Comparative Guide, Mondaq, (September 11, 2023), https://www.mondaq.com/india/insolvencybankruptcyre-structuring/1317604/restructuring–insolvency-comparative-.

[4] Prashant, Anita Dugar, Scheme of Arrangement during Liquidation under Companies Act, 2013, Samisti Legal, (October 31,2020) https://samistilegal.in/scheme-of-arrangement-during-liquidation-under-companies-act-2013/.

[5]Rasiklal S. Mardia v. Amar Dye Chem Limited, 2019 SCC OnLineNCLAT 243.

[6]Sun Pharmaceutical Industries Ltd. v. Sumit Binani, 2022 SCC OnLineNCLAT 27.

[7]Innoventive Industries Ltd. v. ICICI Bank, 2017 SCC OnLineNCLAT 70.

[8]Gujarat Urja Vikas Nigam Limited v. Amit Gupta, 2020 SCC OnLine SC 1167.

[9]Jitender Arora, Resolution Professional of M/s. Premia Projects Ltd v. Tek Chand2021 SCC OnLineNCLAT 1759.

[10]Pratap Technocrats (P) Ltd. v. Monitoring Committee of Reliance Infratel Limited, 2021 SCC OnLineNCLAT 384.

[11]Sandeep Bhuraria and Monish Surendran, CIRP: Preparation of Resolution plan and its Approval, Live Law, (July, 11 2023)https://www.livelaw.in/law-firms/law-firm-articles-/cirp-resolution-plan-nclt-zeus-law-associates-evaluation-matrix-232466.

[12]Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta and Ors(2020) 8 SCC 53.

[13]K. Sashidhar vs. Indian Overseas Bank and Ors2019 SCC ONLINE SC 2572019 SCC 12 150.