Calcutta HC: NCLT order mandating filing record of default from the Information Utility to prove financial debt by the financial creditors struck down October 23, 2020
Published in: Between The Lines
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The High Court of Calcutta (“HC”) has in its combined judgment dated August 18, 2020 (“Judgment”) in the matter of Univalue Projects Private Limited v. Union of India [W. P. No. 5595 (W) of 2020] and Cygnus Investments and Finance Private Limited & Another v. Union of India and Others [W.P. No. 5861 (W) of 2020], held 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 Information Utility (“IU”) or any other documents as specified in the Insolvency and Bankruptcy Code, 2016 (“IBC”) to prove the existence of a financial debt.
The writ petitions had been filed by the petitioners under Article 226 of the Constitution of India against an impugned order dated May 12, 2020 issued by the Registrar of the National Company Law Tribunal (“NCLT”) at its principal bench in New Delhi, that prima facie appeared to have been issued with the approval of the Hon’ble Acting President of the NCLT, New Delhi. The said order imposed a mandatory prescription on all financial creditors, as defined under the provisions of the IBC, to submit certain financial information as a record of default before the IU, as a condition precedent for filing any new application as well as retrospectively on all those financial creditors who have pre-existing applications filed under Section 7 of the IBC, and pending before various benches of the NCLT, prior to such final hearing of these applications.
The first writ petitioner who had a pre-existing application filed under Section 7 of the IBC pending before the NCLT at its Kolkata Bench, argued that the impugned order has altered their substantive rights. It was also urged that the order has been issued de hors the parent act that establishes the NCLT, that is, the Companies Act, 2013 (“CA”), other relevant provisions of the IBC and as well as in contravention of regulations issued by the Insolvency and Bankruptcy Board of India (“IBBI”).
The learned counsel for the second writ petitioner urged that the petitioner, Cygnus Investments and Finance Private Limited, wanted to file a new application under Section 7 of the IBC to initiate a corporate insolvency resolution process against the targeted corporate debtor, but was restricted to do so due to the impugned order that required a filing of such an application to be appended with the record of default from an IU. The Hon’ble judge heard both the petitioners jointly and decided to pass a common judgement.
(i) What is the scope of the NCLT and whether the impugned order is de hors the IBC and the rules and regulations framed thereunder?
(ii) If the answer of the above is in negative, whether the NCLT could enforce the same retrospectively?
Contentions raised by the petitioners:
The counsel for the first writ petitioner, referred to Section 424 of the CA and stated that the functioning of the NCLT and the National Company Law Appellate Tribunal (“NCLAT”), though not bound by the Code of Civil Procedure, 1908, still has to be guided by the principles of natural justice and is subject to the provisions of both the CA and the IBC and the rules and regulations established thereunder. Therefore, it has no power to alter the provisions of the CA or the IBC or the regulations framed thereunder. It was further argued that, on a comprehensive reading of Section 214 and Section 215 read with Section 240 of the IBC and Regulation 20(1) of the IBBI (Information Utilities) Regulations, 2017, it is clear that Section 215(2)of the IBC becomes imperative in the case of class of financial creditors who have a ‘security interest’ with respect to the financial debt as against the unsecured class of creditors, as the petitioners, who do not have such a security interest.
The learned counsel relied on the judgment of the Supreme Court in Hitendra Vishnu Thakur v. The State of Maharashtra [(1994) 4 SCC 602] to point out that the procedural statute should not be applied retrospectively where it will result into creation of new disabilities or obligations.
The learned counsel of the petitioner contended that the continuous usage of word ‘or’ in the Section 7(3)(a) of the IBC implies and indicates that the intention of the legislature was to make this section disjunctive. Stress was laid on the fact that a record of default recorded with the IU is one of the designated methods to prove the existence of a financial debt that has accrued to a financial creditor. It was contended that the intention of the legislature must be found in the words used by the legislature itself in their plain grammatical meaning. The learned counsel also relied upon Regulation 8 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”) to highlight that Sub Regulation (2) of Regulation 8 enlists four other categories of documents in addition to the filing of records of default with IU, that may be submitted to prove the claims of creditors. Further, precedents of the NCLAT in Neelkanth Township and Construction Private Limited v. Urban Infrastructure Trustees Limited [Company Appeal (AT) (Insolvency) No. 44 of 2017 dated August 11, 2017] and Bharti Defence and Infrastructure Limited v. Edelweiss Asset Reconstruction Company Limited [Company Appeal (AT) (Insolvency) No. 71 of 2017 dated October 17, 2017] were referred, in which it was held that submitting the financial information before the IU cannot be a mandatory provision or sole criteria to prove the existence of a default in relation to financial debt.
The learned counsel appearing for the petitioners in the second writ petition, cited the dictum of General Officer Commanding – in – Chief v. Subhash Chandra Yadav [AIR 1988 SC 876] and stated that, two conditions must be fulfilled for a subordinate rule to have the effect of the statutory provision: (a) such rules must conform to the provisions of the statute under which it is framed, and (b) it must also be within the scope and purview of the rule making power of the authority framing the rule. Reference was made to the scope of Section 424 of the CA to infer that neither the Hon’ble Acting President of the NCLT, New Delhi nor the Registrar of the NCLT have the power of rule-making. The learned counsel also relied on the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (“AA Rules”), specifically Rule 4(1) of the AA Rules, that deals with the application filed by financial creditor. According to the said rule, other documents, records and evidences can be filed alongside the Form-1 to prove an existing default.
An interesting submission was made by the learned counsel that NCLT was also not empowered by the inherent powers under Rule 11 of the National Company Law Tribunal Rules, 2016 to promulgate the impugned order. Reliance was placed on Tata Chemicals Limited v. Kshitish Bardhan Chunilal Nath [AIR 2019 Cal 353] to submit that the scope of inherent powers cannot be exercised such that it is in conflict with the statute or against legislative intent.
Contentions raised by the respondents:
The learned counsel for the respondent argued that both the NCLT and NCLAT can regulate their own procedures as per Section 424 of the CA and hence, were well within their rights to issue the impugned order. It was further stated that the Section 215(2) of the IBC does not make any distinction between a secured creditor and an unsecured creditor. It was further submitted that in both the situations, that is, submission of financial information, and, information relating to assets in relation to which security interest has been created, in such form as prescribed by the regulations, a financial creditor has to file such information with the IU mandatorily, irrespective of being a secured or an unsecured creditor. The learned counsel then relies on the Supreme Court judgement of Izhar Ahmad Khan v. Union of India [AIR 1962, SC 1052] to submit that there are two categories of law, substantive and procedural law, wherein evidence is a part of procedural law. Hence, it is the power of the tribunal to regulate its own procedure within the Section 424 of the CA. He further argued that no new disabilities have been created by the impugned order since the Section 7(3)(a) of the IBC states mandatorily that the financial creditor shall furnish the application and record of default with the IU.
Observations of the High Court of Calcutta
Multiple precedents were referred and it was observed that 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 the CA or the IBC, inclusive of any rules/regulations framed under such legislations. In Government of Andhra Pradesh v. P. Laxmi Devi (Smt) [(2008) 4 SCC 720] the SC had captured the hierarchy of the legal norms in India based on the jurist Kelsen’s ‘Pure Theory of Law’. Therefore, it was inferred that the Acts passed by the Parliament preceded over the Rules enacted by the Government or the Regulatory Board and at the bottom of the pyramid lay adjudicating authority regulating their own procedures.
The phrase ‘as may be specified’ under Section 7(3)(a) of the IBC, read with the definition of the term “specified” under Section 3(32) of the IBC were referred, to conclude that the positive conditions separated by “or” are read in the alternative and that there are three categories of evidence that can be provided. It was observed, while referring to various provisions, including Section 7 of the IBC read with Rule 4 of the AA Rules, Form-1 therein, Regulation 8 of the CIRP Regulations and precedents, that apart from the financial information of the IU, eight classes of documents can be considered to be sources that evidence a “financial debt”.
Decision of the High Court of Calcutta
The Hon’ble HC of Calcutta held that IU was only one of the designated methods of furnishing proof to the NCLT, to prove the existence of a financial debt that has accrued to a financial creditor. The Hon’ble Bench observed that the impugned order is a “prickly thorn” which is against the principle of natural justice and that it adversely affected the substantive rights of the petitioners as financial creditors envisaged under the IBC. The bench held that the order did not qualify the tests laid down in the judgement of General Officer Commanding – in – Chief v. Subhash Chandra Yadav [AIR 1988 SC 876]. The Bench further held that the retrospective nature of the order does create new disabilities for the financial creditors and was bad in law. The NCLT acted without jurisdiction and exceeded beyond its limit of the four corners of Section 424 of the CA, and was in violation of Section 7(3)(a) of the IBC and rules and regulations framed thereunder. Hence, the impugned order is de hors the CA, the IBC, and rules and regulations framed thereunder.
The HC was of the view that the financial creditors can rely on either a record of the default from the IU or any other document as specified to showcase a financial debt. Therefore, it can be inferred that Section 215 of the IBC is not mandatory in nature. It is also clarified that any delegatee under the IBC and the CA, that is, the Central Government, the IBBI and the NCLT, cannot make any retrospective regulations. Hence, the impugned order dated May 12, 2020 issued by the principal bench of the NCLT, New Delhi was held to be ultra vires the IBC and the regulations thereunder, and was accordingly struck down.
Vaish Associates Advocates View:
This judgement clarified an important area of law, pursuant to the order dated May 12, 2020 issued by the principal bench of the NCLT, New Delhi. The HC highlighted the hierarchy of legal norms in India and reiterated the well-established principle that a delegated or subordinate legislation cannot be retrospective in nature, unless the rule-making authority has been vested with power under a statute to make rules with retrospective effect. The HC has vividly looked at the nature of the transactions that the IBC governs, the dynamics of which cannot be restricted by imposing rules/regulations in retrospect.
The financial creditors play a major role in the society and therefore, in lines with the object of the IBC, the judgement has protected the interests of all the stakeholders. The HC, by making filings of record of default with the IU only directory in nature, has further prescribed that the procedural aspects of law cannot ride over the substance and the object of the law. The procedures are only meant to promote the interest of the beneficiaries. Even though IUs are, in principle, a positive change, the HC has worked to ensure that no person shall be negatively affected due to the non-filing of past debts with the IU. In due course of time, IUs shall be the norm, however, for now, the HC has rightly ensured that it is not mandatory in nature.
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