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Thursday, April 06, 2017

Does the NCLT Have Enough Judges?

by Devendra Damle and Prasanth Regy.

The recently passed Finance Bill made headlines for combining tribunals, purportedly to rationalise their functioning. This is not the first such attempt. The Parliament set up the National Company Law Tribunal (NCLT) with a similar objective of streamlining all judicial proceedings under the Companies Act, 1956 and Companies Act, 2013. It has been operating since June 2016. The NCLT will hear all cases under these Acts which would earlier have gone to one of four existing courts and tribunals: the Company Law Board (CLB), Board for Industrial and Financial Reconstruction (BIFR), high courts (HCs) and Debt Recovery Tribunals (DRT).

However, commentators have pointed out that the NCLT is ill-equipped to cope with the pending cases it will inherit from the high courts and three tribunals. Others have pointed out that many of the legal and procedural issues which made the other tribunals ineffective will likely plague the NCLT too. One common concern is whether there are enough judges.

The popular discourse till date has largely focussed on pending cases which the NCLT will inherit. While the volume of these cases is substantial, we estimate that the volume of new cases which will instituted will be even larger. In this article we estimate how many judges the NCLT will need to handle this caseload. We find that the present strength of the NCLT is far lower than what is required. If this problem is not solved, NCLT is likely to end up a slow and inefficient tribunal.

Our Approach

We use the tribunals which would have originally heard the cases as a proxy for the different types of cases NCLT will hear. So we have HC-type cases, BIFR-type cases, DRT-type cases, and CLB-type cases. To calculate the number of judges NCLT needs, we need to know the:

  1. Annual rate of institution of cases of each type (I), and
  2. Annual rate of disposal of cases per judge for cases of each type (D).

To get I, we take the average number of cases instituted every year in HCs and each of the three tribunals. We only count the kind of cases which will be transferred to NCLT. For example, original jurisdiction company petitions were earlier being heard by HCs, but will now be heard by NCLT. So, from the total cases instituted in HCs every year, we only count original jurisdiction company petitions.

For D, we first calculate the average number of cases (of the relevant kind) disposed of by HCs and each of the three tribunals every year. Then we divide this average disposal rate for each of them by the number of judges. For example, the CLB has 5 benches. So D for CLB is equal to total cases disposed of by CLB in one year divided by 5. Thus, we get the average disposal rate per judge for each of the four types.

I/D gives us the number of judges required for disposing of each type of case instituted in one year. Adding all values of I/D gives the total judges NCLT will need to dispose of all cases of all types instituted every year.

What is the NCLT's caseload?

In an article by the consultancy Alvarez and Marsal, the authors estimate that a total of 24,900 existing cases — 4,000 from CLB, 700 from BIFR, 5,200 from HCs, and 15,000 from DRT — will be transferred to NCLT. Cases which were being heard by CLB will be be transferred to the NCLT automatically. Cases from BIFR will only be taken up by the NCLT if the parties file fresh applications. Cases from HCs which are eligible for transfer to NCLT, will be transferred in stages through notifications by the Ministry of Corporate Affairs. Assuming all cases do get transferred to NCLT, the tribunal will start with 24,900 cases.

What about the admission of new cases? From 2011-12 to 2014-15, on an average the CLB admitted about 10,170 cases per year (See CLB Annual Statistics).

In the same period, BIFR admitted an average 140 new cases per year (See BIFR Annual Statistics).

All HCs put together admitted approximately 14,000 original jurisdiction company matters in 2015-16 (See SC Annual Report 2015-16). In the Bombay, Delhi and Orissa HCs, approximately 90% of all original jurisdiction company matters are company petitions and applications made thereunder, cases likely to now go to NCLT. Assuming this proportion holds good for all HCs, about 12,700 cases which would earlier have gone to HCs will now be heard by NCLT.

DRTs admitted an average 21,470 Original Applications (OA cases) per year from 2012-13 to 2014-15 under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (See here and here). In a sample of about 15,000 cases we collected from Delhi DRT-3 company and LLP related matters — matters which will now be heard by NCLT — constitute approximately 45% of the total cases. That brings the number to 9660 cases for all DRTs put together. These are the cases which will now go to NCLT instead of DRTs.

Table.1: Institution rate of fresh cases in NCLT
Type of Cases Institution Rate (I)
(cases per year)
HCs 12,700
BIFR 140
DRT 9,660
CLB 10,170
Total 32,670

This brings the total volume of fresh cases to 32,670. This will be the annual rate of institution of new cases in NCLT, assuming it stays constant over the years. The next question we have to tackle is: how many of these cases can be disposed of in a year?

What will be the disposal rate of cases?

The DRT had an average disposal rate of 360 cases per judge per year (from 2012-13 to 2014-15). The CLB had an average disposal rate of approximately 1,705 per judge per year (from 2012-13 to 2014-15). We assume the disposal rate for these types of cases will be the same even in NCLT.

For cases from DRT and CLB we can straightaway use the respective tribunals' disposal rates.

For HCs and BIFR, the disposal rate cannot be calculated in the same manner. HCs deal with a large variety of matters. Of these, company petitions — the kind of cases which will now be heard by NCLT — form a small fraction. The average per judge annual disposal rate for all HCs put together is 19. Bombay HC, which has the highest disposal rate for company petitions among all HCs, only disposes of 60 company petition cases per judge per year. It stands to reason that a specialised tribunal like NCLT would have a higher disposal rate than that. Therefore, we assume that in NCLT these cases will have the same disposal rate as DRTs' average disposal rate i.e. 360 per judge per year.

BIFR is notorious for cases pending for a very long time. In the three years from 2010 to 2013, BIFR disposed of just 169 cases (62 pending). Since the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2015 have more streamlined processes for winding-up of companies, it is expected that the disposal rate would be higher when NCLT takes over cases being heard by BIFR. Therefore, we assume that when NCLT hears these cases it will dispose of them at a rate equal to DRT's disposal rate i.e. 360 per judge per year.

For cases from HCs and BIFR, why do we take the disposal rate of DRTs and not CLB? Unlike DRT, 60–80% of the CLB's caseload consisted of compliance related matters or small matters. For example, in 2013-14 and 2014-15, 60% and 40% (respectively) of the cases instituted in CLBs were matters regarding taking deposits without advertising (Sec.58A(9) Companies Act, 1956). These are routine matters and have high disposal rates; the ratio of annual disposals to institutions is consistently close to 1. Substantive matters on the other hand constitute 20–40% of the instituted cases, and their disposal rate is much lower. For example, in cases regarding mismanagement of companies (Sec. 397, 398 Companies Act, 1956), the ratio of annual disposals to institutions is around 0.7. Between 2013-14 to 2014-15 cases under Sec. 397/398 constituted 4–6% of total cases instituted in CLB, but represented 40% of the total pending matters at the end of the year. Since most of the cases heard by HCs and BIFR are expected to be of a substantive nature, we cannot use CLB's average disposal rate. Therefore, we assume that NCLT's disposal rate for these cases will be similar to the DRTs' average disposal rate, rather than the CLB's.

How many judges does the NLCT need?

Armed with the institution and disposal rates of each type of case we can now calculate the number of judges required. One last consideration is the structural difference between the NCLT and the other tribunals. The NCLT has two types of benches, viz. division benches consisting of 2 judges and single benches consisting of 1 judge. Therefore, in the case of NCLT we calculate the number of benches rather than judges.

Table.2: NCLT Benches Required
Type of Cases Institution Rate (I) Disposal Rate (D) Benches Required (I/D)
(cases per year) (cases per bench per year)
HCs + BIFR 12,840 360 36
DRT 9,660 360 27
CLB 10,170 1,705 6
Total 32,670 473 69

Thus, we estimate that the NCLT will require 69 benches just to keep up with its caseload. We can also use these disposal rates to calculate the number of judges required for clearing the inherited backlog of 24,900 cases. If these cases are to be disposed of steadily over the next five years, NCLT would need about 80 benches.

The NCLT currently has 14 benches (in eleven locations) (See here, here and here). With a disposal rate of 473 per bench per year, and 14 benches, NCLT can dispose of 6,620 cases per year, i.e. only a fifth of the incoming fresh cases. At this rate, the NCLT will accumulate a backlog of 26,050 cases per year; a total backlog of 1,30,250 cases in five years. The Central Government is planning to establish one NCLT bench in every HC jurisdiction, i.e. a total of 24. Even with 24 benches, the NCLT would accumulate a backlog of 21,320 every year. That's a total backlog of 1,06,600 cases over the next five years.

It should be noted that in these calculations we haven't factored in any increase in the rate of filing fresh cases, nor have we considered the entirely new categories of cases (e.g.: class action suits) which the NCLT will hear. These will place an even greater burden on the tribunal.

Some corroborating evidence for our predictions

Some data on the disposal rates of NCLT are already available. In the six months from June 2016 to November 2016, NCLT disposed of 1,930 cases. From June to August only 240 cases were disposed of. This is probably because the NCLT just started functioning in June. The bulk of the cases — 1690 — were disposed of in the last three months, i.e. from September to November. If we take the disposal rate for just these three months and project it for the whole year, it translates to a disposal rate of approximately 6,750 cases per year. This is close to our estimated disposal rate of 6,620 cases per year.

Conclusions

There is evidence to suggest that badly designed procedures which allow unecessary adjournments, lost working days, and administrative inefficiency substantially contribute to judicial delays and pendency. In the case of NCLT, even if these issues are fixed and we manage to double its disposal rate, the current bench strength would still be far short of what is required to handle its caseload.

This analysis draws attention to the fact that we need to do a better job of estimating the judicial resources required to handle case loads. What we have presented in this article is an example of a Judicial Impact Assessment (JIA): estimating the resources required in the judiciary to handle the case load, using data on court productivity. A pre-requisite for JIA is the availability of high-quality empirical data on case loads and productivity. It is important that JIA should be institutionalised in the legislative process, so that courts are able to deliver timely justice.

The US has a specialised body called the National Centre for State Courts dedicated to conducting research on the functioning of state courts. It maintains databases of case-level data and has developed models for various kinds of judicial needs assessments for state courts. It has even developed software for court and case management, which are currently used in the US state courts. There is a similar system in place for federal courts. The estimates for judicial resource requirements in both cases are based on weighted caseloads which are derived from granular, case-level data.

One significant difference between India and the US is that in comparison to the US, it is easier for the Government of India to change the number of benches as needed. In the US, new judgeships can only be created by an act of the legislature. By contrast, in India, new benches for the NCLT can be created by the Central Government simply by notification. What is however lacking is a sound process for determining the number of judges/benches needed.

With its lack of adequate number of benches, the NCLT is likely to be plagued by delays just like its predecessors. A more efficient judicial procedure, and greater bench strength, are both required to effect a lasting solution.

References

Pratik Datta and Prasanth Regy. Judicial procedures will make or break the Insolvency and Bankruptcy Code. Ajay Shah's Blog, January 2017.

Prasanth Regy, Shubho Roy and Renuka Sane. Understanding Judicial Delays in India: Evidence from Debt Recovery Tribunals. Ajay Shah's Blog, May 18, 2016.

Pratik Datta and Ajay Shah. How to make courts work? Ajay Shah's Blog, February 22, 2015.

Reserve Bank of India. Report on Trend and Progress of Banking in India 2015-16

Nikhil Shah, Khushboo Vaish, Kavya Ramanathan. NCLT Readiness Report. Alvares and Marsal India, 2017

Company Law Board, annual statistics.

Lok Sabha Questions on cases pending in DRT dated 4th March 2016 and 4th December 2015.


The authors are researchers at the National Institute of Public Finance and Policy, New Delhi.

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