How did the NCLT prioritize matters during and after the COVID-19 lockdown? An empirical analysis

In a system constrained by lack of resources, the order of priority assigned to a case has substantive repercussions for all the stakeholders involved in a case.
How did the NCLT prioritize matters during and after the COVID-19 lockdown? An empirical analysis
NCLT- Image for representational purposes

In an earlier article, we demonstrated a 95% drop in the number of cases heard by the National Company Law Tribunal (NCLT) – India’s largest commercial tribunal in terms of the number of laws it adjudicates on - during the COVID-19 lockdown.

We also found that while most sectors of the economy had resumed operations to a large extent by June, the effective output of the NCLT was less than 20% of its pre-lockdown levels. In this article, we take a look at how the NCLT prioritized cases during the lockdown.

At the start of the lockdown, most Indian courts and tribunals restricted themselves to hearing only "urgent cases" through video conferencing. It is hard to pre-define the categories of cases that courts should consider urgent or non-urgent. Yet, there can be a common principle-based framework for making this decision that can be applied depending on the kinds of cases that the court adjudicates.

For example, in April 2020, when the courts in UK started functioning under limited capacity, they published guidance on Priority 1 cases and Priority 2 cases.

There is some evidence of inconsistency in practice across courts in determining the urgency of serious matters such as bail. Such evidence is valuable. However, systematic data on patterns and the kind of cases that were heard by a court during the pandemic can shed light on what the courts considered as urgent. Such data-backed discourse on the prioritization of cases at courts during the lockdown and otherwise, is currently missing.

Data and methods

To study the prioritization of cases at the NCLT and their treatment during the lockdown, we once again drew upon the daily causelists published by the NCLT. This data-set is described here. Our study period spans three months. To identify whether there were any shifts in the composition of cases scheduled for hearing during the lockdown, we divide the study period into three phases: pre-lockdown, lockdown and unlock (Table 1). The pre-lockdown phase allows us to observe the regular functioning of the NCLT. The lockdown and the unlock phases allow us to observe its functioning during the COVID-19 period.

Study Period
Study Period

For our analysis, we classify the matters heard by the NCLT into three categories: matters under the Insolvency and Bankruptcy Code, 2016 ("IBC matters"), matters dealing with schemes of compromise and arrangements between shareholders or creditors and companies ("CA schemes") under the Companies Act, 2013, and other matters under the Companies Act or the Limited Liability Partnership Act, 2008 ("other matters").

For our analysis period, from the NCLT website, we got data for 22 bench-court combinations. We used 18 of these, namely 6 courtrooms of the NCLT bench in New Delhi (including the Principal Bench), 5 courtrooms of the NCLT bench in Mumbai, 2 courtrooms for the bench in Kolkata, and one each for the benches in Bengaluru, Chandigarh, Cuttack, Guwahati and Jaipur. We excluded four bench-court combinations - 2 for Chennai, and one each for Allahabad and Kochi - due to sparse causelist availability. The Ahmedabad bench is also excluded, as no data is available.

Prioritization of scheme-related hearings

Table 2 shows the composition of the cases heard by the NCLT across the three phases of our study. Our analysis of the scheduling of cases in the pre-lockdown period shows that the pattern of hearing was being driven by the proportion of matters that were before the tribunal. Since two-thirds of the matters before the tribunal were IBC-related, the scheduling of hearings also reflected this pattern. Similarly, non-scheme Companies Act matters were getting heard in proportion to such matters being there before the NCLT.

During the lockdown, we note a sharp decline in the number of IBC cases scheduled for hearing. The share of IBC cases dropped from 68% in the pre-lockdown phase to 11% during lockdown. Even within the Companies Act cases, we found a sharp shift in the mix of prioritization. In the pre-lockdown phase, the greater focus (22%) was on the other matters. These include matters such as shareholder disputes, matters involving the approval of corporate actions (such as the reduction of capital), proceedings against directors or the management, and the dissolution of companies by striking them off the register of the Registrar of Companies and so on.

However, during the lockdown, CA scheme-related matters were prioritized, not just above IBC matters, but also above other Companies Act matters. After the lockdown was lifted with effect from June 1, the prioritization pattern changed again, and we found a near equal distribution of cases heard by the NCLT across these three broad categories.

Composition of hearings in the causelist
Composition of hearings in the causelist

The prioritisation of scheme-related matters during the lockdown period was done explicitly through the constitution of special benches in Mumbai and New Delhi for hearing the same. This choice could have been driven by the fact that CA schemes are in respect of material corporate actions and are often undisputed. This would make them conducive for quick disposal.

However, this does not necessarily mean that they were more urgent than the other two categories of matters. The only other category of matters that were prioritised were cases under Section 252 of the Companies Act, which deals with appeals by a company against an order of dissolution passed against it by the Registrar of Companies.

The rationale underyling the prioritization of cases heard during the lockdown period remains a puzzle. The pandemic and the nearly ten-week nationwide lockdown reportedly increased the financial distress in the economy. On March 24, the Finance Minister announced the government's proposal to suspend the IBC if the situation did not improve by April 3. The IBC is widely perceived as the quickest tool for credit recovery in India. Given this perception, the announcement of a possible suspension of the IBC in March is likely to have accelerated the number of new cases under the IBC after March 24.

Finally, on June 5, the Central government promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 ("IBC Suspension Ordinance"), which suspended the operation of the IBC in respect of COVID-related defaults. Simply put, debt defaults committed between March 25 and September 24 could not be used to trigger the IBC. This means that the number of hearings dedicated to the IBC ought to have dropped in the second or third week of June. Our analysis, however, shows that the share of IBC cases heard by the NCLT after June 5 reverted to nearly half its pre-lockdown share.

NCLT- Image for representational purposes
[BREAKING] Centre notifies Ordinance to suspend initiation of corporate insolvency resolution process on account of COVID-19

Old versus new cases

To understand the question of priortization of cases better, we analyse the purpose for which IBC matters and CA schemes were scheduled for hearing during the lockdown period. Fig.1 is a two dimensional matrix graph that shows: (1) the categories of matters that were scheduled for hearing on the y-axis, and (2) the purpose for which matters were scheduled on the x-axis. On each graph, the red line indicates the start of the lockdown and the green line indicates the end of the lockdown. The number on the top of each graph indicates the average number of hearings that took place in each of the periods viz pre-lockdown, lockdown and unlock.

The graph shows us that in the pre-lockdown period, maximum new admissions were happening under IBC, followed by other matters. During the lockdown period, new admissions came to a near standstill across all categories of matters. However, in respect of old matters being scheduled for hearing, the prioritization changed. IBC matter hearings fell from a daily average of 265 in the pre-lockdown period to 2 during the lockdown. Other Companies Act matters fell from 94 to 16.

However, scheme-related hearings continued at be scheduled at close to their pre-lockdown levels. In the unlock phase, some new admissions started under IBC as well as Companies Act. There was also some improvement in the number of hearings scheduled for pre-existing IBC cases. However, the prioritization of Companies Act matters over IBC, a pattern very different from the pre-lockdown phase, continued.

Puzzles on de-prioritization of IBC cases

Our finding that the NCLT had nearly stopped scheduling new IBC matters and reduced the number of substantial hearings for pre-existing IBC matters during the lockdown, is worth analysing in the context of the executive actions in respect of the IBC. On March 24, the Finance Minister had announced the government's intention to suspend the IBC. However, the precise contours of this suspension were not clear. One would imagine that the threat of a suspension in the near future would incentivise many categories of creditors to file their IBC cases before the suspension. However, the NCLT data shows that this was not the case.

Our analysis suggests that the IBC Suspension Ordinance might have had a premature effect on the composition of cases heard at the NCLT during the lockdown. While the ordinance was promulgated only on June 5, there is a sharp drop in the IBC cases heard by the NCLT from March 24 onwards, the date on which the potential suspension of the IBC was first announced by the Finance Ministry.

It is possible that the announcement might have altered the behaviour of litigants who stopped pursuing existing IBC proceedings or filing new IBC cases due to the uncertainty caused by the announcement. The de-prioritisation of IBC cases during the lockdown period is suggestive of the extent to which the announcement of a possible suspension of the law affected the triage function in case scheduling.

Conclusion

Our study shows that the NCLT used its scarce capacity during the lockdown to dispose of existing (even if less contentious) cases such as the CA schemes. This is inconsistent with a common understanding of what might constitute an "urgent case".

While our finding is specific to the NCLT, it underscores the need for courts and tribunals to lay down a principle-based approach for case scheduling in exceptional circumstances when they are functioning with limited capacity. This framework will need to address two issues: (1) what is an "exceptional circumstance", and (2) what is an "urgent matter" in an exceptional circumstance. This framework can emerge in two possible ways. It could emerge through case-law that acts as precedent or has persuasive value. This is a slow and evolving approach. The other approach is to allow judges to pre-define this framework and publish it.

Such a framework will further the cause of the rule of law, transparency, and the delivery of justice when courts function with limited capacity during the pandemic.

Central to the case scheduling problem is also the idea of case management and court administration in normal times. Currently, there is no common framework that informs the average litigant on the manner in which a date will be assigned to her case. Much depends on the court and within the court, the judge to whom the matter is assigned for hearing, the nature of the case, the urgency of the interim relief sought, the existing backlog and the court registry.

Exceptional circumstances simply exacerbate the complexity of the judicial triage for courts as resources are even more limited than in ordinary circumstances, but the problem nevertheless exists on a daily basis. In a system constrained by lack of resources, the order of priority assigned to a case has substantive repercussions for all the stakeholders involved in a case.

Finally, it is common for private organisations that handle work of the scale handled by courts to implement a medium to long term plan outlining the phases in which they will resume full-scale functioning. In several jurisdictions, courts have published their medium term strategy to restore full-scale operations (For example, courts in Delaware, USA and courts in the UK).

Given the uncertainty of the time horizons on which the pandemic will play out, Indian courts must endeavour to publish their strategy and plan for resuming functioning at full-scale. This is essential for justice delivery and the public confidence in the judiciary's ability and willingness to get back on its feet.

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