Calcutta HC strikes down NCLT order of creditor-filing of default record

Calcutta HC strikes down NCLT order of creditor-filing of default record

On Aug 19th the Calcutta High Court has nullified the order of the National Company Law Tribunal (NCLT) order that provided earlier all financial creditors shall be required to mandatorily file a default record from information utility along with a plea under Section 7 of Insolvency & Bankruptcy Code. 

These findings were provided by Justice Shekhar B. Saraf in the petition challenging the order passed by the NCLT earlier on May 12, 2020, with respect to the submission of records from Information Utility. Earlier the order prescribed mandatory obligation on all financial creditors to submit financial information from the Information Utility as a condition precedent for filing an application under Section 7 of Insolvency and Bankruptcy Code 2016.

The Court has held that a financial creditor can rely on any other mode of evidence to represent a financial debt. It was also stated that there will be no mandatory requirement to file a default record of financial information from Information Utility along with a plea under Section 7 of Insolvency & Bankruptcy Code as previously held with re. Univalue Projects Pvt. Ltd vs UOI.

What is section 7 of the IBC 2016?

Section 7 of the IBC provides for the initiation of the corporate insolvency resolution process by financial creditor. It states that – a financial creditor either by itself or mutually with any other financial creditors, or any other person working on behalf of a financial creditor, as may be notified by the creditor may submit an application for initiation of a corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority on the occurrence of a default.

Submissions by the Court:

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

1.    The Petitioner contended that the NCLT did not own the statutory or regulatory provisions to support the order under challenge.

2.    Section 424 of the Companies Act, 2013, did not confer any powers on the authorities like the NCLT/NCLAT to establish such rules of procedure that are in effect alteration of the legal provisions of Companies Act, the IBC or the regulations framed under IBC.

3.    Section 7(3) (a)of the IBC conditions that a record of default documented with the Information Utility is only one of the selected methods of furnishing proof to the Adjudicating Authority.

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

5.    Section 215(2) IBC does not mandate to file an information utility for all the classes of creditors but by only such financial creditors who have a ‘security interest’ attached with such financial debt.

Arguments Given by Respondents:

The response submitted by the respondents inter alia was argued in the following points-

1.    The impugned order relied on Section 424 of the Companies Act 2013 that empowers NCLT/NCLAT to act and regulate their own procedure.

2.    The impugned order in the effective implementation of the obligatory and necessary requirements and compliance of various necessities of IBC.

3.     Section 215(2) of IBC doesn’t prescribe any basis for distinction among a secured creditor and an unsecured creditor and therefore, an information utility had to be submitted by all financial creditors.

4.    Section 7 of the IBC provides that all three classes of documents stated in it had to be submitted and thus information Utility was mandatory.

Findings of the Court:

The judgment stated that financial creditors can independently depend upon any of the means to present a financial debt which could be any record of default from the information utility or any other specified document that evidences the existence of the financial debt.

The Court examined in detail the extent of the powers granted to and available with the NCLT and NCLAT and stated though institutions like NCLT/NCLAT are free to regulate their own procedure, such use of its power is restricted and subject to the principles of natural justice as well as the provisions of CA, 2013 or the IBC, 2016 which also includes rules/ regulations made under the IBC, 2016 formulated by the regulatory body namely, the IBBI.

Analysis of Facts:

1. The Court determined the scope of Section 7(3) (a) IBC and after scrutinizing the relevant provisions, it found that the section used the term “or” which are adversative in nature and indicated that the conditions separated by it are to be read in the alternative.

The three categories of evidence are as follows: 

(a) Evidence of default in the form of 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.

2. 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. 

3. 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 re. Swiss Ribbons case, it was clear that apart from the financial information of the Information Utility, there were about eight classes of documents that could be used as an alternative source of evidence in “financial debt”.

4. Considering provisions of section 215 of IBC that provides about the"Procedure for submission, etc., of the financial information “the Court held that submission of the data to the information utility was not compulsory for all.

5. Lastly, it was held that an order which hinders the procedure of the statutory provision of the parent Act cannot be approved in exercising of NCLT's inherent powers as provided under the Rule 11 of the NCLT. Thus, in such matters delegates like the NCLT and IBBI could not have the power to frame rules retrospective in nature and to and create new disabilities for financial creditors.

Conclusion- What did the final judgment say?

The Court acknowledged that the NCLT has acted without its jurisdiction and exceeded its jurisdiction beyond the provisions of Section 424 of the CA, 2013, and Section 7(3)(a) of the IBC, 2016. Additionally, the order was in contradiction to the Rule 4 of AA Rules, 2016, and Regulation 8 of the CIRP Regulations, 2016. 

Nevertheless, NCLT and NCLAT have been bestowed with powers to act and regulate their own procedure, but such use of powers was in excess of the provisions of Companies Act 2013 and IBC Code 2016 and opposed to the principles of natural justice.


eStartIndia Team

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