Calcutta High Court
Calcutta High Court
Litigation News

Cal HC strikes down NCLT order mandating filing of default record from Information Utility for Sec 7 IBC plea

The Court has held that a financial creditor can rely on other modes of evidence to showcase a financial debt.

Aditi Singh

The Calcutta High Court has struck down the NCLT order directing all financial creditors to mandatorily file default record from Information Utility along with a plea under Section 7 of Insolvency & Bankruptcy Code. (Univalue Projects Pvt. Ltd vs UOI)

I am of the view that financial creditors can rely on either of the modes of evidences at hand to showcase a financial debt, that is, either a record of default from the IU OR any other document as specified which proves the existence of a financial debt.
Calcutta High Court has clarified.

The Judgment was passed by a Bench of Justice Shekhar B. Saraf in petitions challenging the order passed by the Principal Bench of National Company Law Tribunal (NCLT) on May 12, 2020 on the aspect of filing of record from Information Utility.

Justice Shekhar B Saraf
Justice Shekhar B Saraf

The order had imposed a mandatory prescription on all financial creditors under IBC to submit financial information from the Information Utility as a condition precedent for filing an application under Section 7 IBC.

The order extended the mandate retrospectively on all pending applications under Section 7 of the IBC, 2016 before the various Benches of the NCLT.

Aggrieved by the order, the Petitioners argued that the NCLT did not possess the statutory or regulatory backing to issue the order under challenge.

Broadly, the submissions made in this regard were as follows:

- Section 424 of the Companies Act, 2013, conferred no powers to NCLT/NCLAT to makes such rules of such procedure that alter the statutory provisions of Companies Act, the IBC or the regulations framed IBC.

- Section 7(3)(a) IBC states that a record of default recorded with the Information Utility is only one of the designated methods of furnishing proof to the Adjudicating Authority.

- Regulation 8 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 lists other relevant documents that may be submitted by a financial creditor to prove the financial claims of such a creditor.

- Section 215(2) IBC does not make it mandatory for all classes of creditors to fill in the Information Utility and the same had to be done only by those financial creditors who have a ‘security interest’ created with respect to this financial debt.

In response, the Respondents inter alia argued as follows:

- Section 424 of the Companies Act vests NCLT/NCLAT with the powers to regulate their own procedures.

- The order was nothing but the implementation of the mandatory and necessary requirements and compliance of various provisions of IBC.

- Section 215(2) makes no distinction between a secured creditor or an unsecured creditor and information utility had to be filed by all financial creditors.

- Interpretation of section 7 establishes all three classes of documents mentioned in it had to be submitted and thus information Utility was mandatory.

FINDINGS

Powers of NCLT

The Court examined in detail the extent of the powers granted to and available with the NCLT and NCLAT and stated,

..while both the NCLT and NCLAT have been conferred with powers to regulate their own procedure, such use of its power is circumscribed and subject to inter alia, the principles of natural justice as well as the provisions of CA, 2013 or the IBC, 2016, inclusive of any rules/ regulations made under the IBC, 2016 by the regulatory body, IBBI.

Analysis of Law

The Court, thereafter, proceeded to ascertain the scope of Section 7(3)(a) IBC and after perusing the relevant provisions, it observed that the Section used the term “or” which is disjunctive in nature and indicated that the conditions separated by it are to be read in the alternative.

“The three categories of evidence that can be provided are as follows: (a) record of the default recorded with the information utility; (b) such other record; (c) evidence of default as may be specified. The disjunctive use of the above makes it clear that either of the three may be provided by the financial creditor to the adjudicating authority.”
Calcutta High Court

It further clarified that the term “as may be specified” in the Section was not applicable to all the three categories but only to the evidence in default.

“In conclusion, on a plain reading of the above provision, it is immanent that three different categories of documents are available to a financial creditor to prove proof of default by a corporate debtor”, the Court remarked.

The Court further noted that in view of various provisions of IBC, Regulation 8 (2)(b) of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 and the observations of the Supreme Court in Swiss Ribbons case, it was clear that apart from the financial information of the Information Utility, there were as many as eight classes of documents that could be considered to be sources that evidence a “financial debt”.

The Court then considered Section 215 IBC on "Procedure for submission, etc., of financial information" and held that submitting data to the Information Utility was not mandatory for all classes of people.

..all factors being taken in consonance and on a harmonious reading of section 215 of the IBC, 2016 with section 7 of the IBC, 2016 alongwith the Rules and Regulation discussed above, I come to the conclusion that the legislature did not intend to make it mandatory for financial creditors to submit financial information to the IU. This view of mine is fortified by the fact that the Supreme Court had also considered the pertinence of the IU based on the IU Regulations, 2017 and specifically stated that other sources of evidence are present apart from the record maintained by the IU. It may therefore be inferred that Section 215 of the IBC, 2016 is not mandatory in nature.”, it said.

Inherent Powers of NCLT and Restrospective Rules

The Court also held that an order which obstructs the operation of the statutory provision of the parent Act and its Rules cannot be passed in exercising of NCLT's inherent powers under Rule 11 of the NCLT Rules.

It added that the a delegatee, such as NCLT or even the IBBI, could not frame regulations which are retrospective and create new disabilities for financial creditors.

Thus, calling the order a “prickly thorn”, the Court concluded,

“..it is apparent that the NCLT has acted without jurisdiction and exceeded its jurisdiction that is limited within the four corners of Section 424 of the CA, 2013 and Section 7(3)(a) of the IBC, 2016. Furthermore, the impugned order is clearly striking a discord with Rule 4 of AA Rules, 2016 and Regulation 8 of the CIRP Regulations, 2016. Hence, the impugned order is so patently without jurisdiction that it cannot be allowed to stand.”

The May 12 order was thus struck down for being ultra vires the IBC and Companies Act.

The two Petitioners were represented by Advocates Ujjaini Chatterjee, Meenakshi Manot, Arjun Asthana, Manju Bhuteria, Rajesh Upadhyay.

The Respondent was represented by Advocates Vipul Kundalia, Avinash Kankania.

Read the Judgment:

Univalue Projects Pvt. Ltd vs UOI.pdf
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