March 3, 2022
WP No. 5595(W) of 2020 with C.A.N 3347 of 2020, High Court of Calcutta, Decided on 18.08.2020
The Registrar, National Company Law Tribunal (‘NCLT’) Principal Bench, New Delhi had issued an order (‘Impugned Order’) that mandatorily requires all financial creditors to submit some financial information as a record of default before the Information Utility, as a condition precedent to file a new application under Section 7, IBC. It applies retrospectively to all the financial creditors that have Section 7 applications filed already. The petitioner, who has already filed a Section 7 application, challenged the Impugned Order on the ground that, it affected his substantive rights under the IBC. He further contended that the Impugned Order is de hors the Companies Act 2013 (‘2013 Act’), that establishes the NCLT and the Regulations issued under the IBC.
The Supreme Court, in various judgments, has pronounced that the Tribunals are permitted to exercise even incidental or ancillary powers, provided they are not proscribed under the statute governing such tribunal. The NCLT/NCLAT, under Section 424 of the 2013 Act, have the power to regulate their own procedure. But such power is limited by and subject to (a) principles of natural justice, (b) provisions of the 2013 Act, IBC, including any rules/regulations made under IBC.
The Impugned Order, being a subordinate rule, has to pass the judicial test, laid down by the Supreme Court, i.e., (a) it has to conform to the provisions of the law it derives its validity from, and (b) it has must fall under the purview of NCLT’s rule making power. The High Court observed that, confoundingly, the Impugned Order by the NCLT is silent on the enabling law under which the said order has been passed.
Further, evidently, Section 7 clearly mentions that with an application, the financial creditor shall furnish record of the default recorded with the information utility or such other record/evidence of default as may be specified. This provision uses the disjunctive word ‘or’, that, in plain language, clarifies that either of the three may be furnished as a record of default. Therefore, the Impugned Order, by mandating record of default as per information utility only, has an effect of limiting the legislative provision that clearly accepts record of default in three manners disjunctively. Hence, the Impugned Order is bad in law.
As per Rule 4 of the AA Rules 2016 (that provides the modus operandi of a Section 7 application) requires the financial creditor to move a Section 7 application with Form – 1. Entry 3 of Form 1 reads – ‘Record of default with the information utility, if any (Attach a copy of such record)’, and Entry 8 reads – ‘List of other documents attached to this application in order to prove the existence of financial debt, the amount and date of default’. Further, Form 1 identifies eight classes of documents under Part V, that the Supreme Court in Swiss Ribbons v UOI, has held to be ‘other sources which evidence a financial debt’. Further, Regulation 8 of the CIRP Regulations 2016 clearly provides for other relevant documents that can be used to prove the existence of default, apart from the information utility. These provisions clearly show that a record of default with the information utility is not mandatory and the law provides other forms of evidence to substantiate the default.
Section 215, IBC reads as: “215. Procedure for submission, etc., of financial information. – (1) Any person who intends to submit financial information to the information utility or access the information from the information utility shall pay such fee and submit information in such form and manner as may be specified by regulations, (2) A financial creditor shall submit financial information and information relating to assets in relation to which any security interest has been created, in such form and manner as may be specified by regulations.(3) An operational creditor may submit financial information to the information utility in such form and manner as may be specified.”
The High Court, on perusal of this section concluded that sub-clause 2 and sub-clause 3 respectively use the word ‘shall’ for a financial creditor to furnish the financial information to information utility, and ‘may’ for an operational creditor. However, the Court further noted that sub-clause 1 contains the phrase ‘any person who intends to’. This shows that submitting the financial information to information utility is not mandatory. This view is also supported by the IBC’s scheme.
NCLT has inherent powers under Rule 11, NCLT Rules. Since the Impugned Order does not refer to any enabling law/provision under which the said order was made, the court assumed that it was made pursuant to Rule 11. The court then pronounced the hierarchy of legal norms as follows: (a) 2013 Act and IBC, then (b) Rules/Regulations under IBC, and then (c) NCLT/NCLAT regulations regulating their own procedure, as supported by the Supreme Court in Govt. of Andhra Pradesh v. P. Laxmi Devi. Based on this, the High Court held that the NCLT, in the Impugned Order (made pursuant to a delegated legislation), cannot rise above its source law even in exercise of its inherent powers.
The Impugned Order, by limiting the options, adversely affects the substantive rights of the financial creditors under the IBC by creating barriers for them in approaching the NCLT, and leaves them on the high seas regarding the corporate insolvency resolution process. Therefore, the NCLT, in the Impugned Order, transgressed its jurisdiction as limited by Section 424, 2013 Act.
Based on the above, the High Court held that the Impugned Order was ultra vires the IBC and the Regulations thereunder, hence liable to be quashed.
We talk to Dr. M. S. Sahoo, the IBBI Chairperson and the flag-bearer of the Indian insolvency and restructuring industry, on a variety of issues.July 12, 2021
ABBREVIATIONS & ACRONYMS USED Committee of Creditors CoC Corporate Debtor CD Corporate Insolvency Resolution Process CIRP Financial Creditor FC The Insolvency and Bankruptcy Board of India IBBI The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 CIRP Regulations Insolvency and Bankruptcy Code, 2016 the Code National Company Law Appellate […]September 22, 2021
Delhi Bench The decision of the Liquidator to conduct an e-auction on the advice of the Stakeholder’s Consultation Committee cannot be appealed, before any decision is made by the Adjudicating Authority: D.R. Corporation (Proprietorship Firm) v. Ravi Kapoor Liquidator of City Tiles Ltd. & Anr. The Liquidator had initiated an e-auction on the recommendation of […]July 8, 2021
(The second prize winning entry by Abhinandan Sharma, a fourth year law student at SLS, Noida, in IBC16’s first edition of the blog writing competition.)September 7, 2021
Abbreviations Used Code – Insolvency and Bankruptcy Code, 2016 CIRP – Corporate Insolvency Resolution Process AA – Adjudicating Authority (NCLT) CD – Corporate Debtor FC – Financial Creditor OC – Operational Creditor CoC – Committee of Creditors IRP – Interim Resolution Professional RP – Resolution Professional RA – Resolution Applicant GST – Goods and Services […]August 15, 2021
Chennai Bench Valuation Report Only to Assist the CoC in Taking a Commercial Decision: Dr Vijay Radhakrishnan v. CS Bijoy P Pulipra, RP PVS Memorial Hospital Pvt Ltd The Appellant was a consultant doctor at the Corporate Debtor hospital, and sought the rejection of the recommended resolution plan and of the valuation report by the […]July 11, 2021