Insolvency regulator IBBI has now virtually laid the blame for the excessive delays in the completion of IBC process at the doors of the creditors—mainly banks. Asserting that stakeholders need to take actions in a time bound manner with the spirit of IBC in mind, IBBI Chairman Ravi Mital has now called for a behavioural change of creditors and urged them to submit their CIRP application early as soon as default has occurred. 

It is in the interest of banks to file the Corporate Insolvency Resolution Plan (CIRP) applications as soon as default occurs, Mital said writing in IBBI’s latest newsletter. He highlighted that more than a year is being taken by financial creditors (basically banks) in filing CIRP applications post occurrence of default. “This delay leads to erosion in value of assets”, Mital said in the article titled “leveraging behavioural change”.

Mital said creditors need to file their applications in time, enclosing certificate of record of default issued by the Information Utility (IU), pre-exchanged correspondences with debtor along with the CIRP application so that the examination by the Adjudication Authority (NCLT) is facilitated and time taken in admission is reduced. “This requires behavioural change at all levels”, he added.

Delayed filing

Insolvency law experts highlighted that it is for the first time ever that the insolvency regulator has flagged the delayed filing of CIRP applications by financial creditors (banks) and was pointing out that this was causing delays to the overall IBC process. 

This comes at a time when there is a concern that the IBC is losing its sheen due to excessive delays and loss of value in the resolution process. 

Mital noted that mere amendments in the IBC/ regulations may not suffice to improve the overall performance. It is necessary for all the stakeholders to take actions in a time bound manner in accordance with the spirit of the Code that reduces delays and maximises the value of the corporate debtor.

IBBI Chief highlighted that substantial time of the AA is consumed in ascertaining ‘existence of debt’ and ‘occurrence of default’ due to examination of voluminous and at times irrelevant documents. Therefore, it is necessary that the creditors must adapt to mandatory submission of the record of default as a proof of existence of default so that the AA can accept the same as sufficient proof of default, Mital added.

Commenting on Mital’s latest suggestion, Mukesh Chand, Senior Counsel, Economic Laws Practice said “While, as suggested by IBBI, it would be ideal if the action is taken by the financial creditor immediately on default, this may not be feasible in the case of the financial creditors especially banks as they follow the mechanisms laid down by RBI and legal action is usually taken when an account becomes non-performing asset (NPA) which occurs after 90 days of initial default.

“Further, the banks also need to follow SMA norms and afford the opportunity to the borrowers to regularise the account before it becomes NPA. Action under IBC immediately on default will also not be good for the smooth operations of industry, commercial activities and also banking process,” he added.

The focus, however, should be on reducing the delay which is occurring after the application has been filed. Recently, there has been judgements from the Supreme Court and High Court, indicating that for admission of section 7 applications, the NCLTs must go into the reasons for default, as such, mere default is not sufficient for admission of such applications, Chand added.

Tahira Karanjawala, Principal Associate, Karanjawala & Co, said IBBI has correctly highlighted this issue and called upon the creditors to undergo a behavioural change and submit the CIRP application as soon the default occurs.

Expert’s take

Yogendra Aldak, Partner, Lakshmikumaran and Sridharan Attorney, said “More often filing of insolvency application is seen as last resort by the lenders and focus is primarily on other alternatives for recovery – realising of the security interest being one of them. Lenders also attempt to maximise recovery by way of out of court settlements. Sometimes, decision making also takes time resulting in late filing for initiation of insolvency”.

This, however, result in disjointed actions against the common borrower and leads to loss of value of assets in the longer term. It also compounds losses over time for the lenders, he added.