Improving judgment enforcement: Let judgment creditors file insolvency resolution applications

by Karan Gulati and Anjali Sharma.

Judgments form the basis of a sound legal system. However, the mere issuance of judgments, without ensuring their prompt enforcement, takes away the incentive to turn to the courts. It also reduces trust in contracts and property rights, the bedrock of economic activity. This discourages investment, curbs entrepreneurial enthusiasm, and impedes national development (World Bank 2003; Chemin 2007; Rao 2020). Beyond economic consequences, a delay or failure in enforcing judgments diminishes public confidence in the judiciary (Salzman and Ramsey 2013).

In India, enforcing monetary judgments is particularly challenging, as evidenced by its low ranking on the World Bank’s ‘Enforcing Contracts’ indicator and data from the National Judicial Data Grid (NJDG). To ensure and expedite the enforcement of such awards, we propose that judgment creditors – holders of a judgment by a court or tribunal – should be allowed to initiate insolvency resolution proceedings against judgment debtors. Due to the severe consequences under the Insolvency and Bankruptcy Code (IBC), such proceedings will deter non-compliant debtors from evading their obligations.

The problem

Enforcing judgments with monetary components is an especially difficult problem. In 2020, India ranked 163rd out of 190 countries on the World Bank’s Doing Business indicator for ‘Enforcing Contracts’. This metric measures the time and cost of enforcing a standard contract in a civil court. In India, once a dispute is initiated, it takes 1,445 days till enforcement, costing 31% of the claim value. In addition to the time already spent securing a judgment, enforcement takes 305 days. As per the NJDG, while approximately 4.5 lakh new execution petitions are instituted each year, only 3.9 lakh are disposed. Even then, less than 15% result in an award or decree.

This poor track record on court-led enforcement also dilutes alternate dispute resolution mechanisms, which operate in the shadow of the law. When parties understand that enforcing settlement agreements is likely to be prolonged, often with poor outcomes, their incentives change. Consequently, such mechanisms are used not to resolve disputes but to avoid payments and cause delays. In fact, poor performance on contract enforcement may be why Indian and international businesses often include international arbitration clauses in contracts when dealing with cross-border transactions.

At present, enforcement of civil judgments is governed by the Code of Civil Procedure 1908 (CPC). To ensure enforcement, a court can attach a judgment debtor’s (a person against whom a judgment capable of execution has been passed) assets, imprison them, or appoint an individual to manage their property. Once attached, the debtor cannot dispose of or transfer the property. If they fail to fulfil the judgment claim, the attached property can be auctioned off. While the CPC comprises intricate and complex procedures, which may be necessary to deal with the myriad of matters adjudicated by the civil court system (for example, specific performance, partition trusts, inheritance rights, etc.), there are no provisions to determine the true value of the debtor’s assets or reverse undervalued or preferential transactions. This allows assets to be unduly siphoned off. Due to the non-specificity of provisions regarding monetary awards, judgment debtors can also exploit procedural gaps and employ dilatory tactics to delay or frustrate the enforcement of such awards.

A proposed solution

The IBC already recognises judgment creditors as ‘creditors’ (Section 3 (10)) with legitimate ‘claims’ (Section 3 (6)) against a debtor. However, because they have not been explicitly recognised as financial or operational creditors, they cannot initiate insolvency resolution proceedings. Instead, they must wait for a financial or operational creditor or the corporate debtor to set the ball rolling on insolvency proceedings and, even then, only file their claims during the process without any participatory rights. This inability to initiate insolvency takes away a potent lever to ensure compliance with judgments.

We propose that judgment creditors be allowed to initiate insolvency resolution proceedings under the IBC. Such a move will pose a significant threat to non-compliant debtors. This is because the IBC creates two significant deterrents against wilful non-payment of claims: (i) the displacement of the promoter when the insolvency resolution proceedings commence, and (ii) a possibility of liquidation of the company if the resolution fails. Given these grave consequences, the judgment debtor’s incentive will be to voluntarily fulfil the judgment claim. This change should be prospective, allowing all creditors to adjust to evolving dynamics.

In fact, when allowed, admission of an insolvency application filed by a judgment creditor should be made simpler than one filed by other creditors. This is because the IBC requires that four factors be considered before admitting an insolvency resolution application: (i) whether there is a claim of a certain threshold, (ii) whether it is undisputed, (iii) whether it has become time-barred, and (iv) whether it has come to the correct bench of the tribunal. In the case of judgment claims, the first three are validated by a court or a tribunal; hence, there are no ambiguities that may delay the admission proceedings.

This is not a novel solution. Judgment creditors can initiate insolvency proceedings in both the United Kingdom and the United States of America.

• United Kingdom: Judgment creditors have specific rights to push a debtor into administration or winding up (analogous to insolvency resolution and liquidation proceedings in India, respectively). Under paragraph 11 of schedule B1, read with Section 123, of the Insolvency Act 1986, a creditor may file an administration application if an order of any court in their favour is returned unsatisfied. Under Section 122, a creditor can file a winding-up application on the same grounds. When it comes to individuals, the process is slightly different. Section 267 of the Insolvency Act allows a creditor to present a bankruptcy petition if the individual owes a judgment debt of £5,000 or more.

• United States of America: Judgment creditors possess distinct rights to push a debtor into involuntary bankruptcy proceedings. Under 11 USC § 303 of the US Bankruptcy Code, upon satisfying the prerequisites, creditors can file an involuntary bankruptcy petition against a debtor. If the court determines the involuntary petition is valid, it will issue an “order for relief,” initiating the bankruptcy process. For individual debtors, this often translates to a Chapter 7 liquidation or a Chapter 13 repayment plan.

To enable this in India, the IBC must be amended to recognise judgment creditors of a monetary award as financial creditors holding financial debt under Sections 5 (7) and 5 (8), respectively. This is because the award includes interest, penalties, or costs, and aligns with the time-value-of-money considerations intrinsic to financial debts. As loans accrue interest over time, judgment awards accumulate interest until settled, mirroring the financial obligations of the judgment debtor. Once a court has passed a monetary award, the claim is rooted in the judgment award, not the original transaction. Hence, even when the underlying dispute is related to the provision of goods or services, the judgment award should be understood to represent a financial debt. This view has been endorsed by the Supreme Court of India and should be legislatively incorporated. The Court, in Kotak Mahindra Bank Limited v A Balakrishnan (2022 INSC 630), has noted that:

Taking into consideration the object and purpose of the IBC, the legislature could never have intended to keep a debt, which is crystallised in the form of a decree, outside the ambit of clause (8) of Section 5 [financial debt] of the IBC.

Classifying judgment creditors as financial creditors during the insolvency process would also ensure that they have an influential participatory role, commensurate with the significance of court-sanctioned monetary awards.

Allowing judgment creditors the power to initiate insolvency proceedings will generate strong monitoring and compliance effects in the pre-insolvency world. Other financial creditors of the debtor will factor current and potential adverse judgment claims into their credit decisions. This, in turn, will generate strong incentives to avoid adverse judgments and to comply with judgment claims when they arise. Conversely, businesses would be compelled to take a proactive stance in settling disputes, knowing the ramifications are not just reputational but could also threaten their solvency and control over the enterprise. It will signal to the market that judgments are not just moral proclamations but actionable financial commitments.

An illustration

To better understand how this will play out, let us consider an arbitration proceeding between X Co and Y Co concerning a contract violation, where the arbitrator awards Rs. 2,00,00,000 to Y. X will likely challenge such the award under Section 34 of the Arbitration and Conciliation Act 1996 (Arbitration Act). Since the grounds for challenge under Section 34 are procedural, courts generally uphold arbitral awards.

Traditionally, Y would have been forced to then rely on the procedure set out under the CPC. However, as mentioned, enforcement under the CPC is notorious for delays. The award would remain stuck in court procedures, and Y may face a cash crunch. The money they rightfully won, tied up in legal battles, would not be accessible for business needs, growth, or reinvestment. At the same time, X would remain operational, benefiting from the liquidity that it has withheld (Gulati and Roy 2020).

However, things may be different if Y is allowed to initiate an insolvency resolution proceeding. Although X may prefer an appeal under Section 37 of the Arbitration Act, the confirmation of the award under Section 34 will convert it into a claim under the IBC (a right to payment reduced to judgment). The initiation of the insolvency proceeding will immediately shift the dynamics. Under IBC, X’s promoters could be displaced, and there may be a potential change in the company’s ownership. Thus, it will attempt to clear the dues and settle its dispute with Y. In essence, the IBC will be the much-needed lifeline for Y, ensuring it doesn’t remain stuck in the quagmire of the CPC and can promptly access its rightful claim.

Concerns

One potential concern regarding the proposal might be the risk of overburdening the insolvency resolution process and, consequently, the NCLT. While the IBC recognises that time is of the essence, it is already struggling with capacity challenges and mounting delays. Overloading this system could create an environment reminiscent of the current civil court enforcement mechanism, fraught with delays and backlogs. This would counteract the benefits and efficiencies the proposed change aims to introduce.

However, this concern does not acknowledge the strong deterrents to frivolous insolvency proceedings built into the IBC. Judgment debtors will need to comply with the minimum default value requirement of Rs. 1,00,00,000. Further, the filing of the insolvency application is understood to aid negotiations between the filing creditor and debtor, often resulting in a settlement between parties outside the purview of the NCLT. As per the Insolvency and Bankruptcy Board of India, 28% of the insolvency resolution matters are settled or withdrawn. These figures do not account for the negotiations in the shadow due to the mere threat of an insolvency application being filed. Thus, the actual strain on the NCLT might be lower than anticipated. 

Similarly, there may be concerns about whether insolvency proceedings can take away the judgment creditor’s right to prefer an appeal against the underlying judgment. These concerns can be alleviated by deferring to good design principles. One way of doing this is to only allow judgment creditors to initiate insolvency proceedings when the judgment debtor has exhausted all statutory remedies (e.g., an appeal under Section 37 of the Arbitration Act by X in our example). As an alternative, it may be recognised that even under the IBC, there is a 14-day period within which an admission application is to be decided. The judgment debtor may file a statutorily permitted appeal against the underlying judgment within this period. In practice, the time between filing an insolvency application and its admission is far more than 14 days. This gives the judgment debtor ample opportunity to prefer statutorily permitted appeals. In such cases, the judgment claim will be viewed as disputed until the appeal is decided, resulting in non-admission of insolvency proceedings. The path to be taken between the two alternatives is a procedural policy decision independent of the merits of the core proposal of allowing judgment creditors to initiate insolvency proceedings.

Conclusion

The efficacy of a legal system not only lies in the issuance of judgments and their timely enforcement. For India, where enforcing monetary judgments remains a daunting challenge, it is pivotal to usher in mechanisms that effectively bridge this gap. Allowing creditors to initiate insolvency resolution applications presents a powerful tool that can drastically transform the landscape of judgment enforcement.

Not only will this proposal push judgment debtors to be more compliant, but it will also signify a broader shift in the perception of judgments. Such reforms, emphasising actionable financial commitments, will help restore public faith in the judiciary, boost investment, and stimulate economic growth. By embracing this change, India can pave the way for a more robust and efficient legal system, thus fostering a climate of trust, accountability, and development.

References

Doing Business: 2020, The World Bank, 2020.

Judging the judiciary: Understanding public confidence in Latin American courts, Ryan Salzman and Adam Ramsey, 2013, Latin American Politics and Society, Volume 55, Issue 1, pp 73-95.

India’s low interest rate regime in litigation, Karan Gulati and Shubho Roy, 11 March 2020, Leap Blog.

Institutional Factors of Credit Allocation: Examining the Role of Judicial Capacity and Bankruptcy Reforms, Manaswini Rao, 2020, JusticeHub.

The Impact of the Judiciary on Economic Activity: Evidence from India, Matthieu Chemin, 2007, Cahier de recherche / Working Paper.

World Development Report 2004: Making Services Work for Poor People, The World Bank, 2003.

The authors are a research fellow and the research director at the TrustBridge Rule of Law Foundation. We are thankful to Madhav Goel and Renuka Sane for their insightful comments. Views are personal.

Lost in Translation: Legislative Drafting and Judicial Discretion

by Madhav Goel and Renuka Sane.

Precisely drafted legislation that reflects its objective and boundaries, and judicial discretion that confines itself to legislative intent are critical pillars of a rule of law economy. There are concerns that both are broken in India. In a new paper, Lost in Translation: Legislative Drafting and Judicial Discretion we discuss these issues in the context of the decision of the Supreme Court in Vidarbha Industries Power Ltd. v. Axis Bank Ltd. (Vidarbha) pertaining to the Insolvency and Bankruptcy Code, 2016 (IBC, or Code).

The IBC sought to introduce an objective test for initiating insolvency, providing that as long as a financial creditor files for insolvency and the objective criteria of "debt" and "default" are established, the National Company Law Tribunal (NCLT) is expected to initiate the corporate insolvency resolution process (CIRP). Until 2022, this intent had been respected. However, Vidarbha conferred discretion on the NCLT to not accept an insolvency petition by relying on the use of the word may in the phrase, may admit the petition, in Section 7. This has opened the gates to increased discretion in the admission of IBC petitions, potentially derailing the entire reform process. In fact, in a majority (56%) of the reported cases the NCLT has chosen to not admit the application for initiation of CIRP. These range from instances where the corporate debtor is owed money, to where the Court suspects the intention of the creditor to file for insolvency. Furthermore, there are two instances where the NCLT/NCLAT has exercised the discretion conferred by Vidarbha in respect of applications by operational creditors under Section 9 of the Code. This is despite the fact that the statutory language of Section 9 as well as the decision in Vidarbha nowhere confers such discretionary powers upon the NCLT/NCLAT. By doing so, the NCLT/NCLAT have potentially opened the door to further expansion of the scope of discretion conferred by Vidarbha to extend to applications under Section 9 as well, an outcome fraught with its own issues.

The Vidarbha judgement raises three questions:

1. Quality of drafting: The Bankruptcy Legislative Reform Commission's recommendation on lack of discretion was clear. The legislation, however, provided no rationale for why it chose to ignore the BLRC report and allow for the possibility of discretion by using the word may in Section 7. If it was an inadvertent change in the language of the provision, then that highlights the need to make the drafting process more robust. If the change was deliberate, then the lack of publicly available reasoning is harmful as it not only goes against the fundamental tenet of rule of law that material decisions ought to be accompanied with reasons, but also because the lack of reasoning has led to uncertainty in the law. Interestingly, the Government itself is pushing for a review of the decision in Vidarbha, a situation that could have been avoided if the drafting processes were more robust, transparent, and accompanied with reasons.
2. Legislative intent: The jurisprudence on the treatment of the words "may" and "shall" has been fairly fluid. The rule of thumb is that the former implies conferral of discretion, while the latter implies a mandatory obligation. However, the rule can be dispensed in certain cases, and the courts can interpret "may" as "shall" and "shall" as "may". These are cases where an analysis of the real intention of the legislature points to dispensing with the rule of thumb. In these instances, the Courts have gone beyond the statutory language and treated the legislative intent as its north star in interpreting the words "may" and "shall". That approach was missing in Vidarbha, and it is unclear why.
3. Tests for applying discretion: The Court did not provide guidelines for exercise of this discretion or for determining insolvency. Unchecked discretion eventually leads to abuse of power. In Vidarbha, the Court failed to provide tests for exercise of discretion to admit/not admit an insolvency petition, thus creating a situation that will lead to greater uncertainty of law. Consequent to Vidarbha, NCLTs will devise their own methods to assess whether a corporate debtor is financially healthy and solvent, thus leading to greater uncertainty and lesser consistency of law. This can already be seen from the fact that the NCLT/NCLAT has exercised discretion in 13 cases to dismiss the CIRP initiation applications for myriad reasons, whereas there are at least 10 other cases where the NCLT/NCLAT has expressly declined to exercise the discretion.

The economic effect of unguided discretion and lack of certainty in the law will be that prolonged litigation and delayed timelines will result in erosion of the economic value of the corporate debtor's assets, reducing the chances of it being brought back to life. As a consequence, the Ministry of Corporate Affairs has proposed a series of amendments to the IBC, one of which seeks to clarify the law that it is mandatory for the NCLT to admit petitions under Section 7 once "debt" and "default" are established. While it fixes the obvious mistake in the initial drafting, it does not guarantee that the judiciary will take cognizance of legislative intent. There is therefore a need for deeper reform, both of legislative drafting, and of the way the judiciary interprets economic and commercial laws.

The authors are researchers at TrustBridge.

How did courts respond to the pandemic lockdowns: evidence from the NCLT

by Pavithra Manivannan, Susan Thomas and Bhargavi Zaveri-Shah.

Introduction

An important problem of the Indian state is the working of the judiciary, which is hampered by procedural frictions and delays. Several research papers measure the output of the judiciary in terms of number of cases disposed and the elapsed time from start to finish (DAKSH (2016), NALSAR (2016), Regy and Roy (2016), Datta et. al (2017), Tata Trust (2019), Vidhi Centre for Legal Policy (2021)). While recognising that the end objective of a sound judiciary is to decide cases correctly, these practical measures of the output of the judiciary are interesting in capturing what the judicial performance is at any point in time, as well as how it changes from one point to the next.

An example of such an episode is the COVID-19 pandemic. This event disrupted all economic and social processes in India, including the working of courts. Service organisations all over the world responded by building an all-digital workflow. With digital adaptations, many service organisations have matched upon pre-pandemic levels of output and productivity. We analyse the quarterly results of listed non-finance services firms for 2019, 2020 and 2021, for the April-May-June quarter. The total net sales of the firms was Rs.2.87 trillion, Rs.2.2 trillion and Rs.3 trillion. These firms had output in 2021 that was similar to that seen in 2019.

In case of the judiciary, the response included selecting urgent matters for hearing, as well as adopting e-filing and virtual hearings as the norm. How did the judiciary in India fare during the lockdowns that were put in place during the peak of the pandemic, once in 2020 and another in 2021?

Sharma and Zaveri (2020) examined the response of the Indian judiciary during the pandemic. They introduced an important innovation in the literature on court performance, by constructing a data-set of outputs based on cause-lists of the NCLT. They used this data-set to examine the relative output of the NCLT during the first pandemic lockdown (25 March 2020 to 30 June 2020) to the output in the pre-lockdown period in 2020 (1 February 2020 to 24 March 2020).

In this study, we carry this research agenda forward. We argue that a useful quantitative measure of output is the number of cases scheduled per day and cases disposed per day. We use this to examine the extent to which the output of the NCLT changed during their repeated exposure to pandemic triggered lockdown conditions. We examine these for three comparable periods in 2019, 2020 and 2021. In this, we recognise that the NCLT added courtrooms during the pandemic period of 2020, which can influence the NCLT output. We also recognise that the NCLT scheduled hearings only for urgent matters, and that the complexity of the matters scheduled can impact the number of disposals. We introduce a classification scheme of complexity of cases, and examine the extent to which the number of cases disposed responds to metrics of case complexity.

Methodology

As with Sharma and Zaveri (2020), our data-set is constructed from the cause-lists of the NCLT. In this article, we measure the months of March, April and May for 2019, 2020 and 2021. We focus on the same three months in each year for two reasons: One, it controls for any variation that may arise due to seasonal factors, such as court vacations and festivals. Second, India saw the peak of the pandemic in these three months in both 2020 and 2021.

The daily cause-lists for each of these periods are available for 11 out of 15 benches of the NCLT. Our analysis is focused on those benches which consistently published cause-lists during each of these three periods. These were the benches of Cuttack, Jaipur, Kolkota, Mumbai and New Delhi (including the Principal bench). This data-set makes it possible to observe the number of cases scheduled on each day and the number of cases disposed. If the NCLT is viewed as a black box, its performance can be measured by the number of cases disposed. (As stated before, there is a quality dimension, which is not addressed in this quantitative research).

When the systems of the NCLT are augmented, whether by introducing additional courtrooms or technology and technology led processes, we expect a scaling up of the number of cases disposed per courtroom per day. In addition to the per day averages, we focus on hearings scheduled and disposals per courtroom per day to understand the extent to which this took place.

When the pandemic began and only urgent matters were scheduled, there could be a selection bias on the part of both plaintiffs and judges to emphasise important and urgent cases. This could generate an increase or decrease in the complexity of cases which, in turn, could impact the measured output of the court. In order to explore this problem, we construct a measure of complexity of cases. For this, we categorise each hearing under five heads: Insolvency and Bankruptcy Code (IBC), Oppression and Mismanagement (O & M) under the Companies Act (CA), Schemes, Strike off Appeals and Miscellaneous. We classify IBC and O & M matters as Complex and all the others as Simple. This allows us to examine the extent to which the observed changes in output have been influenced by a change in complexity.

Results

Table 1: Average daily NCLT output

Period	Hearings	Disposals
Mar - May 2019	399	65
Mar - May 2020	149	30
Mar - May 2021	255	48

In 2019, NCLT scheduled 399 hearings per day and disposed 65 cases per day. Table 1 shows us that, in 2020, in the aftermath of the first extreme lockdown, the output of NCLT dropped both in terms of scheduled hearings (149) and disposed cases (30). It then partially increased in 2021 (255 hearings per day and 48 disposed cases per day). This demonstrates resilience in the NCLT capacity during the second wave, in 2021.

Some benches of the NCLT had a higher number of courtrooms in 2020 and 2021. For example, the number of courtrooms in New Delhi went from 4 in 2019 to 6 in 2020 and 2021. Similarly, in Mumbai, it increased from 3 in 2019 to 5 in 2020 and 2021. On the other hand, the courtrooms for the Kolkata, Cuttack and Jaipur benches remained constant during all three periods. Some of the increased outcomes in 2021 may be owed to the increased number of courtrooms.

In order to control for this feature, we focus on the average disposals per courtroom per day. Table 2 shows that there was a 66% decline from 2019 to 2020, and then a 50% rise in 2021. The final level – 3 disposals per courtroom per day – was half than seen before the pandemic, but better than during the first wave in 2020. This suggests that the addition of courtrooms alone did not significantly alter the output of the NCLT. Wide-scale adoption of technology such as video-conferencing facilities that enabled the NCLT to operate without exposing the members to the virus is likely to have contributed to these improvements in outcome.

Table 2: NCLT output, measured as the average per courtroom per day

Period	Hearings	Disposals
Mar - May 2019	36	6
Mar - May 2020	10	2
Mar - May 2021	17	3

NCLT hears matters of varying complexity. Time taken to dispose off a complex matter might be higher due to the procedures, technicalities and stages involved. The increased outcome in 2021 could have been achieved by NCLT by merely altering the scheduling proportion of complex v. simple cases. We examine whether such a selection bias contributed to higher disposals in 2021.

Table 3: The role of case complexity

Period	Complex	Complex	Simple	Simple
	Hearings	Disposal	Hearings	Disposal
Mar - May 2019	263	35	126	29
Mar - May 2020	102	13	44	16
Mar - May 2021	199	33	50	14

Table 3 shows that the proportion of complex vs. simple cases scheduled for a day, is greater in 2021 than in the pre-pandemic period 2019. In terms of disposal, in 2019, complex and simple cases disposed were of a similar order of magnitude (35 complex cases a day vs. 29 simple cases per day). In 2021, there is evidence of a greater proportion of complex cases being disposed off: 33 complex cases a day vs. 14 simple cases per day. This shift in the case load, in favour of more complex cases, would mean that the increased output of NCLT in 2021 is not out of scheduling larger fraction of simple cases. But this shift would ordinarily go with a reduction in output per courtroom per day, holding productivity constant.

Discussion

The working of the judiciary has deep ramifications on the working of the economy which depends upon timely and just decisions on disputes. While the ultimate objective is that cases should be decided correctly, there is an emerging literature which emphasises quantitative measures of the output of courts. This is an interesting and important line of questioning, even without bringing in the analysis of the quality of court judgements, because it helps to identify and understand the response of the court to disruptions such as the COVID-19 pandemic.

The evidence here shows that NCLT was disposing 65 cases per day under pre-pandemic conditions. In the worst pandemic conditions in 2020, this output dropped to 30 cases disposed per day. Under similar conditions in 2021, output was higher at 48 cases disposed per day.

Did additional courtrooms that were added in 2020 help explain this rise? When output is measured per courtroom per day, there was a decline in 2020 to 2 cases per courtroom per day from a disposal of 6 cases per courtroom per day in 2019. The output went up to 3 cases disposed per courtroom per day in 2021. This is an improvement in the NCLT output, even if it is still at a level which is half of that seen under pre-pandemic conditions, and resulting productivity gain.

Was the output higher because the case mix emphasised more simple cases? This was not the case. On the contrary, there was a shift in favour of more complex cases. In our evidence, complex cases went up from 55% of disposals in 2019 to 70% in 2021. As these cases would be expected to require more time, this constitutes a partial explanation for the reduced output per courtroom seen in 2021 when compared with 2019.

A third factor is the technology and the digital processes adopted and refined by the NCLT after the strict lockdown imposed in 2020 was lifted. The evidence in our study shows that these new processes yielded the NCLT gains in 2021 when compared with 2020.

The Indian law fraternity is debating whether it would be beneficial to revert to physical functioning of courts as opposed to going further into the video environment (Press Trust of India, 2021). In our data, we see that, NCLT productivity was at 3 disposals per courtroom per day in pandemic environment of 2021, as compared with 6 disposals per courtroom per day in the pre-pandemic environment of 2019. These facts can help shape judgement about future possibilities.

References

DAKSH, Access to Justice Survey, Technical report 2016.

Pratik Datta, Surya Prakash B. S. and Renuka Sane, Understanding judicial delay at the Income Tax Appellate Tribunal in India, NIPFP Working Paper No. 208, October 2017

NALSAR University of Law, A study of court management techniques for improving the efficiency of subordinate courts, Technical report 2016.

Prasanth V. Regy and Shubho Roy, Understanding judicial delays in debt tribunals, NIPFP Working Paper No. 195, April 2017.

Tata Trust 2019, India Justice Report: Ranking states on police, judiciary, prison and legal aid, Technical report 2019.

Vidhi Centre for Legal Policy, The Delhi High Court Roster review: A step towards judicial performance evaluation, Technical report 2021.

Anjali Sharma and Bhargavi Zaveri (2020), Measuring court output in the pandemic: evidence from India’s largest commercial tribunal The LEAP blog, 11 September 2020.

Press Trust of India (2021), Continuance of courts virtually will be a problem’: SC on resuming physical hearing, Business Standard, 8 November 2021 at 

Acknowledgements

Pavithra Manivannan is a Research Associate and Susan Thomas is a Senior Research Fellow, both at XKDR Forum in Mumbai. Bhargavi Zaveri-Shah is a doctoral candidate at the National University of Singapore. We thank Pramod Rao, M. S. Sahoo, Ajay Shah, Anjali Sharma and Diya Uday for comments and suggestions.

Resolving municipal distress in India

by Adam Feibelman and Bhargavi Zaveri-Shah.

In recent years, municipal bodies in India have been increasingly accessing the public debt markets. In the four year period beginning 2017 to August 2021, nine municipal corporations made bond issuances aggregating to Rs. 30 billion. In contrast, in the immediately preceding two decades, ten municipal bodies had issued bonds aggregating to less than half this amount. This is generally a positive development. Tapping financial markets expands the resources available to cities for critical services and development. Like firms that access the public markets, municipal bodies that subject themselves to market discipline are held up to higher standards of transparency and local governance. A key missing element in this story, however, is the lack of clarity about municipal creditors' rights in the event of a default by a borrowing municipal body. In a chapter published in the 2021 annual publication of the Insolvency and Bankruptcy Board of India titled Quinquennial of Insolvency and Bankruptcy Code, 2016, we argue that the time is ripe for policymakers in India to develop a re-organisation framework for financially distressed municipal bodies. We evaluate the potential of a formal bankruptcy regime as the model for such a framework.

The case for a municipal re-organisation framework

We make three arguments. We begin by demonstrating the weak state of municipal finances in India. For example, in the decade beginning 2007-08, municipal revenues stagnated at 1% of the GDP, significantly lower than comparable countries. Municipal bodies (urban local bodies or ULBs) are disproportionately reliant on state governments for grants in aid and loans. They are shown to have consistently under-invested in capital infrastructure. The pandemic has exacerbated the weak state of municipal finances in India. The size of the municipal debt market is, therefore, likely to grow as municipalities seek additional resources.

Second, we argue that the current legal regime in India provides neither opportunities for collective action against municipal debt default nor clarity on the treatment of creditors (bond holders, banks and financial institutions, state lending agencies, employees and vendors) in the event of the borrowing municipal body's insolvency. Very few municipal bonds are guaranteed by the state government. At one end of the spectrum, this creates the possibility of aggressive sale of public assets, owned and operated by the ULB for the benefit of the public, by 'powerful' creditors of the ULB. On the other end of the spectrum, this deprives the system of the benefits of early recognition of financial distress in ULBs. It minimizes the possibility of salvaging a ULB's operations through a mutually negotiated and court-supervised re-organisation exercise. The growing levels of municipal borrowing from the public markets and the impact of the COVID-19 pandemic reinforce these concerns.

Third, the standard re-organisation framework applicable to private borrowers does not apply to ULBs as they provide public goods, and most of their assets are presumably for public use. Several countries have enacted differently designed re-organisation frameworks for resolving distressed municipal bodies. We highlight the key features of one such framework, namely, Chapter 9 of the US Bankruptcy Code. To be sure, Chapter 9 has its critics. However, with more than 100 municipal entities having used Chapter 9 for their resolution, it has proven to be a viable municipal bankruptcy regime. It is a rule-bound process, but one that is flexible enough to be able to address the complex problems of government financial distress, which inevitably combine important commercial concerns with essential necessities of social well being. At the least, it helps frame a number of threshold and critical questions that should be part of any discussion on the reorganization of distressed municipal entities.

Key legal and institutional challenges

We conclude by underscoring some key legal and institutional challenges to the idea of a municipal bankruptcy law in India. First, while bankruptcy and insolvency is in the concurrent list of the Constitution, municipal governance is an intrinsically State subject. A union municipal bankruptcy legislation will raise complex questions of federalism and will require provisions that allow states to retain their autonomy in applying a union legislated bankruptcy law to their ULBs. What might be the institutional tools for preserving such autonomy?

Second, experience from the US suggests a pro-active role for courts in administering a municipal bankruptcy. Any framework in India will need to determine whether the court or administrator heading the process will have the power to supervise the functioning of public services during the ULB's insolvency proceedings. If so, this would be a fundamental departure from the design of the Insolvency and Bankruptcy Code, 2016, which seeks to minimise court intervention in the insolvency proceedings and provides for the appointment of Insolvency Professionals for running the debtor's operations. Similarly, the scope of relief that the process can legitimately provide in a ULB's bankruptcy proceeding will need to be considered. Can a resolution plan for a ULB contemplate an increase in taxes? Can it provide for the sale of the ULB-owned public property? How can it do so without impinging upon decisions that are the prerogative of a city level legislature or the state's power?

Enacting a municipal bankruptcy law will require the resolution of these questions and prolonged negotiations with states much like the enactment of the GST framework. However, this should not deter policymakers from beginning the process. The gains of a clear municipal bankruptcy framework, in the face of the severe impacts of the COVID-19 pandemic and the deteriorating state of India's cities, should provide a motivation for doing so. The fact that municipal bonds are set to become an important asset held by Indian households adds an additional imperative and responsibility to ensure that there is a framework in place for addressing municipal financial distress in India.

Adam Feibelman is a Professor of Law and Director of the Center on Law and the Economy at Tulane Law School. Bhargavi Zaveri-Shah is a doctoral candidate at the National University of Singapore.

Management takeover under SARFAESI Act - A zombie law

by Pratik Datta.

Introduction

Ever since Caballero et al (2008) coined the phrase, ‘zombie firms’ have attracted much attention in both academic and policy circles. Macey (2021) recently extended the concept to a wholly new genre of zombies - ‘zombie laws’. Freedom from the clutches of zombie laws is a policy priority for India. The Prime Minister himself highlighted the challenge in his recent Independence Day speech. This piece will use the phrase ‘zombie laws’ broadly to refer to provisions of statutes, regulations, and judicial precedents that continue to apply after their underlying economic and legal bases dissipate. Although there are many obvious examples of zombie laws strewn across the Indian legal landscape, this post will illustrate the problem using a slightly more nuanced example. It will explain why section 13(4)(b) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’) has become a zombie law since the enactment of the Insolvency and Bankruptcy Code in 2016. To appreciate the original rationale behind this provision, it would be useful to set out the broader legislative backdrop.

Background

Section 69 of the Transfer of Property Act, 1882 allows only some mortgagees the right to sell the mortgaged property (security) without court intervention. This right is not available where the mortgagor is of native origin or where the mortgaged property is situated outside presidency towns or any notified area. This legislative design at the time was meant to ensure that the law does not inadvertently empower unscrupulous moneylenders (as mortgagees) against vulnerable native mortgagors in mofussil towns and villages across India. In contrast, European mortgagors in presidency towns were presumed capable enough to take care of their own interests.

Post-independence, this limited right to sell mortgaged property without court intervention proved unsatisfactory for a state-led financial system. Instead of reforming the general law, the Transfer of Property Act, special statutes were enacted to vest the power of sale without court intervention in certain financial institutions like Land Development Banks and State Finance Corporations (‘SFCs’). For example, section 29 of the State Finance Corporations Act, 1951, empowered an SFC to take over the management, possession, or both, of the borrower industrial concern for recovery of its dues. If the borrower still didn’t pay up, the SFC could sell the unit to recover its dues.

In late 1990s, demands were made to extend similar powers to banks and financial institutions to tackle the fledgling non-performing assets problem. This demand resonated with the Andhyarujina Committee, which in March 2000 recommended a special law to empower banks and financial institutions to take possession of securities anywhere in India and sell them for recovery of loans without court intervention. The SARFAESI Act 2002 was the result of this policy thinking.

Section 13 of SARFAESI Act empowers a secured creditor (bank or financial institution) to enforce a security interest created in its favour without court intervention anywhere in India. On default by a borrower, the creditor may serve a notice in writing to the borrower to repay in full within 60 days of receiving such notice. If the borrower fails to comply, the creditor may take recourse to various measures under section 13(4). Clause (b) of section 13(4) initially empowered banks and financial institutions to take over management of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale and realise the secured assets.

In 2004, section 13(4)(b) was amended to empower banks and financial institutions to take over not only the ‘management of the secured assets’, but the entire ‘management of the business’ of the borrower company without court intervention. This includes the right to transfer by way of sale for realising the secured assets. These powers were not originally envisaged by the Andhyarujina Committee.

A Zombie law

In 2000, the Andhyarujina Committee had envisaged the SARFAESI Act as an exception to the general foreclosure law contained in the Transfer of Property Act. Consequently, SARFAESI Act was designed as a special foreclosure law. Like any other foreclosure law, it dealt only with transfer of security (mortgaged property) and not transfer of corporate control of the borrower’s business from shareholders to creditors (or an administrator). The latter is the subject of corporate insolvency law.

When a corporate debtor faces financial distress, shareholders have a perverse incentive to engage in risky strategies. If the strategy pays off, shareholders benefit. If the strategy fails, the creditors bear the losses. To address this moral hazard inherent in the structure of a limited liability company, corporate insolvency law shifts the power to decide on the future of a financially distressed company from its shareholders to its creditors. The creditors could use insolvency law to either restructure their debt in the company or sale the business as a going concern to a third party. This enables the business to exit financial distress with minimal value destruction.

To achieve this outcome, corporate insolvency laws usually provide sophisticated rules to facilitate collective bargaining by the company’s creditors for debt restructuring, appoint an administrator (resolution professional) to monitor a sale, and market the business publicly to maximise the sale value. They also provide various safeguards to check against unfair wealth transfer away from vulnerable claimants of the corporate debtor such as dissenting financial creditors and operational creditors. These safeguards include several unique provisions dealing with preferential transactions, avoidance transactions, wrongful trading, cram down provisions etc. Implementing these safeguards require court supervision.

Foreclosure laws do not require such complicated rules and safeguards since they simply deal with transfer of security and not transfer of corporate control. As a result, court supervision is not as relevant in foreclosure laws. Since SARFAESI Act was initially designed as a special foreclosure law, neither did it provide for the usual safeguards necessary during transfer of corporate control nor did it mandate court supervision to protect vulnerable claimants during such transfers.

The 2004 amendment fundamentally altered this basic design of SARFAESI Act as a foreclosure law. The amended section 13(4)(b) empowered a secured creditor to take over control of the corporate debtor’s business and decide on its future through a sale, a function akin to that of a corporate insolvency law. Yet, unlike a corporate insolvency law, the amendment did not introduce any safeguard or court supervision during takeover of management and subsequent sale of the distressed business. Effectively, the 2004 amendment inserted selective features of corporate insolvency law within a foreclosure law. As a result of this legislative mashup, the amended SARFAESI Act vested disproportionate powers with secured creditors, without safeguarding the interests of other claimants of a corporate debtor. This is not expected of either a foreclosure law or a corporate insolvency law.

This hybrid section 13(4)(b) of SARFAESI Act could have been justified in 2004 as a mechanism to achieve going concern sale of distressed businesses in the absence of a modern corporate insolvency law in India. In 2016 however, India got a comprehensive corporate insolvency law - the Insolvency and Bankruptcy Code (‘IBC’). The IBC now provides a well-defined mechanism to take over management of a distressed corporate debtor to achieve a going concern sale.  On triggering the IBC, the promoter loses control of the corporate debtor. A resolution professional takes over the management, invites plans from potential investors, and places the eligible plans before a committee of financial creditors. This committee can approve a resolution plan by not less than 66% voting share. Such a resolution plan becomes binding only after it is approved by the court (adjudicating authority). Given such elaborate mechanism (with appropriate safeguards) to achieve going concern sales under the IBC, the underlying economic and legal bases for section 13(4)(b) of SARFAESI Act have dissipated. Yet, when SARFAESI Act was amended in 2016 to harmonise it with the IBC, section 13(4)(b) was not revisited. This provision lives on in the statute book only as a zombie law.

Continued existence of such a zombie law is not only unnecessary but it can also be harmful. For instance, the IBC provides stringent safeguards to prevent unfair wealth transfer from dissenting financial creditors and operational creditors. In contrast, section 13(4)(b) of the SARFAESI Act is designed to protect only the interests of secured creditors. It does not offer any credible safeguard for other claimants of a distressed corporate debtor. Therefore, continued use of this section of the SARFAESI Act to take over the management of a distressed corporate debtor without court intervention is detrimental to a wide range of corporate stakeholders.

This problem could be resolved simply by amending section 13(4)(b) to revert to its pre-2004 position. Banks and financial institutions should be able to use section 13(4)(b) only to take over the ‘management of the secured assets’ of the corporate debtor without court intervention and not the management of its entire business. The latter should be permissible only under the IBC. This legal architecture would restore the character of the SARFAESI Act as a special foreclosure law, as originally recommended by the Andhyarujina Committee.

Conclusion

Section 13(4)(b) of SARFAESI Act became a zombie law with the introduction of the IBC. Many such zombies remain scattered across the Indian legal landscape. The government had in 2014 taken a conscious initiative to repeal such laws. Such initiatives are mostly ad hoc. There is no institutional mechanism to tackle the menace. While highlighting this lacuna, former Finance Secretary Dr. Vijay Kelkar suggested that every new economic legislation should ideally have a sunset clause. Incorporating such clauses could nudge the development of requisite institutional capacity to periodically review parliamentary laws and check the rise of the zombies.

Pratik Datta is a Senior Research Fellow at Shardul Amarchand Mangaldas & Co. All views expressed are personal. The author thanks Rajeswari Sengupta, Ajay Shah and two anonymous referees for their useful suggestions.

How large is the payment delays problem in Indian public procurement?

by Pavithra Manivannan and Bhargavi Zaveri.

Payment delays are endemic in government contracts in India. Businesses generally factor payment delays into the price of public sector contracts. Measuring the size and extent of overall payment delays from the government to vendors and contractors has, however, been a challenge. In this article, we use a novel data-set put together from public sources to ascertain the size of the payment delays problem in Indian public procurement.

When a private entity delays contractual payments, the delay is factored into the price of the next vendor contract or the debt contracted by the private entity. This feedback loop naturally instills payment discipline by aligning the payer's incentives with maintaining payment discipline. This is harder to achieve for government contracts, as information about payment delays in public procurement is often sparse, difficult to discern from budgetary statements or missing altogether. The problem is compounded as the state procures goods, services and works at various levels and through various entities owned by it. Payment delays affect the working capital cycle of vendors of all sizes. However, payment delays have a particularly deleterious impact on Micro Small and Medium Enterprises (MSMEs), which often have limited access to formal financial systems to bridge their working capital requirements. Timely payments, therefore, are of crucial importance to MSMEs as they rely on their cash-flow cycle to fund their working capital requirements.

Payment delays in contracts with CPSEs

A significant proportion of overall central government procurement is undertaken by centrally owned public sector enterprises (CPSEs). Most CPSEs are incorporated as companies and many of them are listed. We use the information in the annual results of CPSEs as a proxy to ascertain the scale of payment delays in the public procurement undertaken by the central government. We study the balance sheet and annual reports of listed CPSEs for the last three financial years, 2017-18, 2018-19 and 2019-20 ("study period").

We find that CPSEs had annual average outstanding trade payables of Rs.1.3 trillion as against an annual average procurement value of Rs.1.1 trillion, during our study period. This suggests that the annual average outstanding trade payables of CPSEs were about 18% higher than the annual average procurement undertaken by the CPSEs. We also find that when taken as a percentage of the value procured, CPSEs under some ministries, such as the Railway and Defence Ministries and Ministry of Housing and Urban Affairs, fare significantly worse than others. Further, we find that on an average, payments worth 8% of the total value procured from MSMEs are delayed for more than 45 days from their due date. Finally, we find that CPSEs demonstrate weak payment discipline towards all their vendors, and that the MSME vendors are not worse-off than the other vendors. This suggests that in the case of government contracts, the imbalance of the relative negotiating power of MSME vendors and non-MSME vendors has limited impact on the behaviour of the payer.

Our work demonstrates the potential to develop an ongoing system to measure payment discipline in public procurement, which could then act as a feedback loop for pricing vendor contracts when dealing with CPSEs and the government departments to which they are aligned.

Data and methodology

Our analysis is based on a hand collected data-set put together from the following two public sources of data:

1. the MSME Sambandh portal set up by the the Ministry of Micro, Small and Medium Enterprise in 2017, to monitor the implementation of the Public Procurement Policy, 2012;
2. Annual reports and annual balance sheets published by CPSEs.

Our data-set consists of firm level information about CPSEs, such as the year of their incorporation, listing date, industry classification, variables indicative of their financial health and the procurement undertaken by them. We augment the data-set with information on payments delayed by CPSEs to MSME suppliers beyond 45 days from the date on which such payments became due (hereafter, "delayed payments"). The Micro, Small and Medium Enterprises Act, 2006 (MSME Act)requires all companies that procure goods, services and works from micro, small and medium enterprises to disclose such payments in their annual report in the prescribed format.

Our data-set covers this information for 57 listed CPSEs. We collect the data for these CPSEs for three financial years beginning with the year in which the MSME Sambandh Portal was set up. This gives us data for the financial years, 2017-18, 2018-19 and 2019-20, which is our study period.

These 57 CPSEs are spread across 17 departments or ministries of the Central Government, with the largest number concentrated under the Ministry of Petroleum and Natural Gas (19.3%), followed by the Ministry of Power (10.53%) and the Ministry of Steel (8.77%). The CPSEs in our data-set are spread across 34 industries, as per the National Industrial Classification (NIC) scheme prescribed by the Ministry of Statistics and Programme Implementation (MoSPI). CPSEs in the business of 'electricity, gas, stem and hot water supply' account for the largest group (12.28%) followed by CPSEs engaged in the business of manufacturing coke, refined petroleum products and nuclear fuel (8.77%).

Each CPSE reports a target procurement value at the beginning of the financial year and the actual procurement value at the end of the financial year, on the MSME Sambandh portal. Table 1 shows the aggregate value of goods, services and works targeted and actually procured by the CPSEs in our data-set across different government departments.

Table 1: Procurement by CPSEs

	No. of CPSEs	Target (Rs. crore)	Actual (Rs. crore)
Department of Chemicals and Petrochemicals	2	371.66	308.38
Department of Commerce	2	17.28	18.3
Department of Defense Production	3	1963.33	2880.47
Department of Fertilisers	4	2547.34	2641.74
Department of Heavy Industry	4	16392.1	15209.25
Department of Telecommunications	2	0	0
Ministry of Coal	2	5977.39	1774.82
Ministry of Defense	3	5838.79	7066.05
Ministry of Housing and Urban Affairs	2	12.61	12.67
Ministry of Mines	2	2573	7132.09
Ministry of Petroleum and Natural Gas	11	52175.63	63849.08
Ministry of Power	6	6142.97	6608.55
Ministry of Railways	4	395.07	429.31
Ministry of Science and Technology	1	38	17.49
Ministry of Shipping	3	1725.67	1321.45
Ministry of Steel	5	4556.4	5356.22
Ministry of Tourism	1	125.07	34.85

The Ministry of Petroleum and Natural Gas is the largest procurer in our data-set, both in terms of the number of CPSEs and the value of goods, services and works procured by them. Table 1 also shows that a majority of the CPSEs have procured more than their annual targeted value. We observe this to be true across all the three financial years comprised in our study period.

Findings: CPSEs' outstanding dues

Trade payable are a rough proxy of the amounts due from a firm to vendors and service providers. We use the data on outstanding trade payable from the balance sheets of CPSEs as an estimate of payment delays in public procurement. Table 2 shows the three-year annual average outstanding trade payable due from the CPSEs in our data-set. The second column indicates the corresponding annual average value of procurement undertaken by these CPSEs, and the last column indicates the average outstanding trade payable as a percentage of the average annual procurement undertaken by the CPSEs.

Table 2: Average outstanding trade payable and procurement value

	Procurement value (Rs. crore)	Outstanding payable (Rs. crore)	Payable/ procurement (percent)
Department of Chemicals and Petrochemicals	308.38	106.11	34.41
Department of Commerce	18.3	1119.66	6118.36
Department of Defense Production	2880.47	3449.92	119.77
Department of Fertilizers	2641.74	1971.93	74.65
Department of Heavy Industry	15209.25	10297.54	67.71
Department of Telecommunications	0.00	2313.67	0.00
Ministry of Coal	1774.82	1898.59	106.97
Ministry of Defense	7066.05	3031.90	42.91
Ministry of Housing and Urban Affairs	12.67	2709.40	21384.37
Ministry of Mines	7132.09	1227.54	17.21
Ministry of Petroleum and Natural Gas	63849.08	82830.09	129.73
Ministry of Power	6608.55	7907.65	119.66
Ministry of Railways	429.31	1243.77	289.71
Ministry of Science and Technology	17.49	29.38	167.98
Ministry of Shipping	1321.45	1562.02	118.21
Ministry of Steel	5356.22	8739.99	163.17
Ministry of Tourism	34.85	58.94	169.12
Total	114660.72	130498.11	113.81

While the procurement value of a given financial year does not necessarily mean that the entire value of the contract becomes payable in the same financial year as the procurement contract may span across multiple years, the three year average numbers in Table 3, however, show a systemic break-down in the payment discipline of CPSEs. We speculate that these trade payable would have aggregated over time, and do not necessarily pertain entirely to the study period.

We then look at three departments/ ministries that account for the largest procurement by value in our data-set, to investigate the differences in the payment behaviour of CPSEs towards MSMEs and non-MSME vendors (Table 3). The CPSEs in these three departments also account for nearly 75% of the total outstanding trade payable of all the CPSEs in our data-set.

Table 3: Outstanding trade payable of CPSEs (as percent of value procured)

	2017-18		2018-19		2019-20		Total
	Non-MSME	MSME	Non-MSME	MSME	Non-MSME	MSME	Non-MSME	MSME
Department of Heavy Industry	84.02	7.87	80.87	15.82	110.63	11.81	88.89	12.22
Ministry of Petroleum and Natural Gas	182.65	7.60	187.97	3.56	143.05	4.13	171.49	4.32
Ministry of Power	116.44	14.90	161.54	15.35	292.02	21.73	175.63	17.46

In each of the three cases, the proportion of total outstanding trade payable to the value procured by the CPSEs during the study period is much higher for non-MSMEs than MSMEs. In the case of the Ministry of Petroleum and Natural Gas and the Ministry of Steel, the proportion of outstanding trade payable to non-MSME vendors exceeds 100% of the value procured, on an aggregate basis across the three years. Compared to non-MSME vendors, this proportion is significantly lower for MSME vendors (the highest being 21%).

Findings: Delayed payments by CPSEs to MSME suppliers

The final leg of our measurement involves estimating the 'delayed payments' by CPSEs to MSMEs, that is, payments delayed beyond 45 days from their due date. We aggregate the delayed payments outstanding as at year-end, by CPSEs to MSMEs, government department wise. Table 4 shows the delayed payments as a percentage of their annual procurement value from MSMEs.

Table 4: Delayed payments as percentage of procurement

	2017-18	2018-19	2019-20	Average
Department of Chemicals and Petrochemicals	6.22	11.73	11.84	10.46
Department of Commerce	0.86	47.38	1.08	17.47
Department of Defense Production	5.82	3.35	5.44	4.78
Department of Fertilizers	7.58	5.25	4.82	5.38
Department of Heavy Industry	7.91	15.92	12.11	12.37
Department of Telecommunications	0	0	0	0
Ministry of Coal	9.11	5.42	8.47	7.19
Ministry of Defense	3.55	3.20	3.98	3.56
Ministry of Housing and Urban Affairs	6.72	4.86	5.49	5.70
Ministry of Mines	2.79	1.51	2.85	2.37
Ministry of Petroleum and Natural Gas	4.12	4.80	6.18	5.25
Ministry of Power	24.95	25.33	31.87	27.51
Ministry of Railways	11.03	20.58	11.02	13.62
Ministry of Science and Technology	0	0	0	0
Ministry of Shipping	14.36	3.47	2.94	5.62
Ministry of Steel	4.84	10.18	4.81	6.18
Ministry of Tourism	0	0	21.13	21.13
Total	7.36	8.06	8.70	8.16

We find that the delayed payments by CPSEs to MSMEs average at about 8% of the actual value of goods, services and works procured by them from MSMEs during the study period. This percentage has marginally increased from 2017-2018, and is higher than the average in 2019-20.

Conclusion

In this article, we take a sector-agnostic approach to measure the scale of the payment delays problem in public procurement in India. An analysis of the annual returns and balance sheets of CPSEs gives us new insights on the scale of the problem at three levels, namely, at the level of the CPSE, the industry and the government department to which the CPSE is aligned.

Our analysis provides evidence of the popular perception of CPSEs' weak payment discipline to vendors. Taken as a percentage of the average procurement undertaken by CPSEs, the payment delays by CPSEs to their vendors far exceeds their procurement values. Second, while CPSEs demonstrate weak payment discipline to both MSME and non-MSME vendors, the delay seems to be much larger towards large vendors than the small ones. Third, the delayed payments reporting requirements mandated under the MSME Act provides us an illustrative picture on the payment discipline of the CPSEs. For two out of three years of our study period, we notice that the total delayed payments to MSMEs is higher than the three-years average (Rs. 2323.42 crores).

Our approach of understanding payment delays in public procurement in India, through balance sheets of CPSEs demonstrates the possibility of setting up ongoing systems for the measurement of payment discipline of government departments through CPSEs aligned to them. Further, these delays may be indicative of either of liquidity mismatches or solvency issues, at the CPSE, or a mix of both. By approaching this problem from a balance sheet perspective, our study lays the foundation for conducting future work on the possible relationship between the financial health of the procurers and their payment discipline.

The authors are researchers at the CMI-Finance Research Group and thank Susan Thomas for valuable discussions.

Judicial triage in the lockdown: evidence from India's largest commercial tribunal

by Anjali Sharma and Bhargavi Zaveri.

Introduction

An important idea in medical science is triage. It refers to the process of sorting patients for treatment, depending on the severity of their conditon and the likelihood of recovery. The medical triage process is governed by standard operating procedures (SOPs), which allow limited discretion to doctors and surgeons on the prioritisation of patients for treatment. Courts in India also perform a triage function, and they do this every day. They decide which cases will be scheduled for hearing on any given day and which will be heard on later dates. In a world of infinite court capacity, triage would not matter as much because all cases would come up for hearing in a short period of time. However, in the context of limited court capacity, triage becomes a critical element of the adjudication function. Unlike in the medical profession, in the judicial function, there are no settled rules or SOPs on how courts must triage. Given this, the decisions of courts on prioritising and de-prioritising matters are often the subject of intense scrutiny.

In ordinary times, case-scheduling is within the discretion of the judge and the court registry. While some judges pre-announce the manner in which they will prioritise matters for hearing, others do not. The practice of scheduling is often interrupted by matters that are 'urgent'. Urgent matters are taken up out of turn if the judge is convinced that there will be irreparable harm if the matter were not heard urgently. This makes triaging complex and discretionary enough in normal times.

Triaging becomes more complex in exceptional circumstances when courts are functioning at lesser than their usual capacity, such as, in the ongoing pandemic. Triaging in such exceptional circumstances is different from triaging in normal times. First, the nature of the "exceptional circumstance" might inherently offer some prioritisation. For example, during a pandemic, cases involving questions of public health would, at least intuitively, be more important than cases involving criminal defamation or suits for declaration of title to land. Second, unlike in routine triaging where courts prioritise matters, in exceptional circumstances, triaging is about de-prioritising matters. This makes the triaging decision more complex.

One such exceptional circumstance in the recent period was the announcement of the nationwide lockdown on 24th March. At the start of the lockdown, most Indian courts and tribunals restricted themselves to hearing only "urgent cases" through video conferencing (example, example and example). It is hard to pre-define the categories of cases that courts should consider urgent or non-urgent. Yet, there can be a common principal 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 were functioning with limited capacity, the administrative body responsible for supporting the courts published guidance on Priority 1 cases and Priority 2 cases that the courts will hear. In the absence of such a framework in India, judicial triage in India during the pandemic continues to be done by the judges, the court registry or a combination of the two.

In this article, we ask the question: how did Indian courts perform this triage during the lockdown period? There is anecdotal evidence of inconsistency in practice across courts in determining the urgency of serious matters such as bail. Such evidence is valuable. However, data on patterns and the kind of cases that were heard by a court during the pandemic can shed light on how the courts actually perform this 'triage'. Such data-backed discourse on the prioritisation of cases at courts during the lockdown and otherwise, is currently missing.

We focus our question on the National Company Law Tribunal (NCLT), which is the largest commercial tribunal in India in terms of the number of laws it adjudicates. It adjudicates cases under the Companies Act, the Insolvency and Bankruptcy Code and the Limited Liability Partnership Act. It adjudicates a range of firm-related matters such as shareholder disputes, approvals for corporate actions and mergers and acquistions, proceedings against directors and companies and bankruptcy cases. In a previous article, we demonstrated the impact of the lockdown on the functioning of the NCLT. Using daily cause-lists as a source of our data, we found that there was a 95% drop in the number of cases heard by the NCLT during the lockdown period. With the NCLT functioning at such a low capacity, the question of prioritisation of cases at the NCLT is more critical as most of the cases were not likely to be heard during this period.

Data and methods

In order to study the prioritisation of cases at the NCLT and their treatment during the lockdown, we drew upon the daily cause-lists 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 court functioning in the post-Covid world.

Table 1: Study period

Phase	Dates	Days of data
Pre-lockdown	1st February to 24th March	34
Lockdown	25th March to 31st May	31
Unlock	1st June to 30th June	22

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 get data for 22 bench-court combinations. We use 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 exclude 4 bench-court combinations, 2 for Chennai, and one each for Allahabad and Kochi due to sparse causelist availability. Ahmedabad bench is 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 court. Since two thirds of the matters before the court 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.

However, we found that during the lockdown there was 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 prioritisation. In the pre-lockdown phase, the greater focus (22%) was on the Other matters. These comprise of 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 companies' register of the Registrar of Companies and so on. During the lockdown, CA Scheme-related matters were prioritised, not just above IBC matters but also above Other Companies Act matters. After the lockdown was lifted with effect from 1st June, the prioritisation pattern changed again and we found a near equal distribution of cases heard by the NCLT across these three broad categories.

Table 2: Composition of hearings in the causelist

	Share of hearings (in %)
	IBC	CA Scheme	Other matters	Total
Pre lock-down	67.8	7.1	21.7	96.6
Lockdown	11.3	57.6	29.7	98.7
Unlock	34.2	32.7	31.1	98.0

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 scheme-related matters. 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. Section 252 of the Companies Act deals with appeals by a company against an order of dissolution passed against it by the Registrar of Companies.

The rationale underyling the prioritisation of cases heard during the lockdown period remains a puzzle. The pandemic and the nearly 10 week nationwide lockdown reportedly increased the financial distress in the economy. On 24th March, the Finance Minister announced the government's proposal to suspend the IBC if the situation did not improve by 3rd April. 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 24th March, 2020.

Finally, on 5th June, 2020, 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 25th March and 24th September 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 5th June reverted to nearly half its pre-lockdown share.

Old versus new cases

To understand the question of priortisation 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 indicate 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 CA-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 prioritisation changed. IBC matters' 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 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 prioritisation of Companies Act matters over IBC, a pattern very different from the pre-lockdown phase, continued.

Puzzles on de-prioritisation 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 24th March, 2020, 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 pre-mature effect on the composition of cases heard at the NCLT during the lockdown. While the ordinance was promulgated only on 5th June, there is a sharp drop in the IBC cases heard by the NCLT from 24th March 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 IBC existing 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 analysis 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. Further, the analysis on new v. old cases indicates that most of the schemes heard during the lockdown were the existing schemes. This is inconsistent with a common understanding of what might constitute an "urgent case". There might have been urgent matters under the IBC. For instance, matters where the resolution plan had been finalised and was awaiting the approval of the NCLT. In such matters, given the possible global impact of the pandemic, it was likely that the resolution plans already finalised might get withdrawn warranting an urgent hearing for the NCLT's approval of the resolution plan.

While our finding is specific to the NCLT, it underscores the need for courts to lay down a principle based approach to triaging in exceptional circumstances when the tribunal is 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 triaging 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 resources, the order of priority assigned to a case has substantive repurcussions for all the stakeholders involved in a case. In the absence of certainty on triaging, the system is vulnerable to abuse. It compels a litigant to rely on the registry, the judge and the lawyer. Resultantly, the system is naturally titled towards litigants who can afford competent lawyers.

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 (example; example). Given the uncertainty on the time horizons of the pandemic, Indian courts must endeavour to publish their strategy and plan for 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.

The authors are researchers with the Finance Research Group. They would like to thank Ajay Shah for useful discussions, an anonymous referee for inputs on this article and Rahul Somani for developing the code for constructing the data-set.