Afflictions In The Mandatory Filing Of Records With The Information Utility Under IBC

BY SHREYASHI TIWARI, LEGAL OFFICER AT EXPORT IMPORT BANK OF INDIA AND SHAMBHAVI SRIVASTAVA, FIFTH-YEAR STUDENT AT NUSRL, RANCHI.

Recently, in  Univalue Projects Pvt. Ltd v. Union of India & Ors., the Hon’ble Calcutta High Court has quashed the order passed by National Company Law Tribunal (“NCLT”), New Delhi whereby it was mandated that financial creditors file a record of default from the Information Utility (“IUs”) when an application for initiation of corporate insolvency resolution process is being filed under section 7 of Insolvency and Bankruptcy Code, 2016 (“IBC”). The article analyses the scope of powers conferred upon NCLT to formulate such laws and further highlights how the provisions of IBC as well as the rules and regulations thereunder clearly showcase existence of no such fixed criteria for establishing the proof of default before an adjudicating authority.

Background of the case

The petitions in the present case have been filed against the impugned order passed by the Registrar of NCLT, New Delhi, with the approval of the Hon’ble Acting President of the NCLT, New Delhi dated May 12, 2020 passed by NCLT, New Delhi, whereby it was made  mandatory for the financial creditors at the time of filing an application under Section 7 of the IBC, to submit record of default from IU before the NCLT. Further, the order also allowed for the said provision to be made applicable to the applications which have been pending for admission before the NCLT under Section 7 whereby  it would be mandatory for the financial creditors to submit such information to the IUs  before the next date of hearing in order for their applications to not be dismissed. 

Concept of Information Utility

IU  is one of the four essential pillars of the IBC. Section 210 of IBC provides for registration of IUs  for the purpose of providing core services viz. accepting, recording authentication & verification of the financial information submitted by a person (Corporate/Operational Debtor or Insolvency Professional) to persons as may be specified, thus,  IUs act as a catalyst in the CIRP process.  The IUs are regulated vide the IBBI (Information Utility) Regulations, 2017. Despite having an indispensable role, the IU continues to be the least utilised even after a passage of three years since IBC was passed.

It was in the light of the above that the NCLT passed the order mandating the Financial Creditors who approach the NCLT for CIRP (including the ones already pending before the bench) to mandatorily file ‘default record’ from IU.

Repercussions that would have followed the NCLT judgment

IBC defines “core services” under section 213 as all the services which are provided by the IUs. However, there do exist various anomalies in the IBBI (Information Utility) Regulations, 2017 (“IU Regulations”)which would have caused undue impact on the CIRP had the NCLT’s order mandating the filing of records with the IU been upheld. For example, Regulation 19(3) of the IU Regulations states that a user can access information stored with an IU through any IU. It is not unknown that all the companies have potentially sensitive data which may put the company in a vulnerable position if accessed by the general public. The risk of data piracy and data theft mulls over the financial creditors, operational creditors and corporate debtors, considering that the entire database is digital and hence, they might prefer not revealing the information in its full capacity. Similarly, Regulation 20 of the IU Regulation stipulates that the IU should provide an acknowledgment in the light of the data not being mishandled. The draft regulations provided that such acknowledgment shall be coupled with digital signature of the IU.  However, since the IU Regulations do not resonate the same, it may bring in shadow the credibility of the IU in case of any mismanagement with the data.

Moreover, the IU Regulation 20(1) also states that the information shall be submitted in accordance with ‘Form C’ of the schedule provided in the IU Regulation, much against the framework of IBC which intends the IUs to be an electronic repository of financial information, and not merely one conventional document management system. Even the electronic storing of the data comes with its own repercussions. Yet another issue arises with IU Regulation 25 (2) which provides for the authority to any user to unilaterally mark any data as erroneous. This regulation, hence, provides arbitrary authority to any user to manipulate the data, since the IUs, upon registration, provide a unique identifier under IU Regulation 18, and hence, a user may access the information stored with an IU through any IU Therefore, such access  makes the company vulnerable to unforeseeable risks and damages.

Merely mandating that the IUs adopt a “Secure system” as per Regulation 20 is not enough to ensure data protection of any company and cannot be used as admissible evidence with already so many loopholes existing.

More often than not, IUs have been faced with an entry barrier. This is one of the most fundamental reasons as to why till today there exists but one IU (National e-Governance Services Ltd. (NeSL) in India. Regulation 3 of the IU Regulations mandates the IUs to have a net worth of at least Rs. 50 crores, and further prevents foreign control of IUs. Moreover, Regulation 6(2)(e) provides that an IU must pay a fee of fifty lakh rupees to the Board annually. For a financially struggling nation, placing such minimum eligibility criteria has no rationale.  This may lead to monopoly in the market structure.

Further, the entity, since it would be in possession of such sensitive information, should be in a position to leverage cut tint edge technology. This in turn puts more burden on NeSL to carry out the functions single handedly on such a massive scale.  Hence, the companies do not resort to IUs.

NCLT’s power to issue such orders

Needless to mention, the judgment of the NCLT has attempted to implement IBC in its letter and spirit. However, the question arises if the NCLT’s jurisdiction is wide enough to pass such orders?

This aspect was analysed at length by the Hon’ble Calcutta High Court  taking a  stance that it is outside the ambit of NCLT or the Registrar of NCLT to formulate laws and policies which are not in consonance with the parent acts which in this scenario is the Companies Act, 2013 (“CA, 2013”) as well as the IBC, 2016. The power of tribunals, when it comes to admitting evidence and following the rules of procedure, essentially should not be in In the present case, NCLT’s sudden order would affect the substantive rights of the financial creditors thus creating hindrances in timely recovery of their dues from the debtors, the very purpose of the IBC. In breaking down the limits of the nature of power, while tribunals such as NCLT/NCLAT are vested with incidental powers, such powers can only be exercised when there is no express provision prohibiting such incident or ancillary powers. The Supreme Court has held that incidental and tribunals must be vested with incidental and ancillary powers in order to provide justice to the parties as long as contrary provisions with respect to the same already exists. The Calcutta High Court ruled affirmed the ratio laid down in Union of India v. Paras Laminates that “[T]he powers of the Tribunal are no doubt limited. Its area of jurisdiction is clearly defined, but within the bounds of its jurisdiction, it has all the powers expressly and impliedly granted. The implied grant is, of course, limited by the express grant.” The Calcutta HC cited Section 424(1) of Companies Act, 2013 which mentions ‘natural justice’ as one such express criteria for the orders which are passed by NCLT and found the May 2020 order in violation of the same, thereby NCLT exceeding the scope of ancillary/incidental powers conferred upon it.

Methods of proving ‘existence of debt’

As mentioned, the IUs store in the information that helps in ascertaining the existence of a debt of a company. However, IBC also provides for other provisions that assist in concluding the existence of the debt. For example, interpreting Section 7(3)(a) of IBC, it clearly provides that a record of default submitted by an applicant is one of the methods to establish ‘existence of debt’ accrued to a financial creditor. Hence, section 7(3)(a) is disjunctive in nature and in addition to the records submitted to the IU, also enumerates any other record and evidence of default as may be specified as documents that can be submitted by the financial creditor to prove corporate debtor’s debt. The respondents argued that the term ‘as may be specified’ in Section 7(3)(a) be applicable to all the three conditions mentioned therein. The Court refuted their claim by applying the rules of interpretation and principles of litera legis to the said provision, and affirmed the term is applicable to  any of the three categories. The Court also identified that  ‘Part V’ of Form-1 under Rule 4(1) of The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (“AA Rules, 2016”)  read with Regulation 8 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provide more than one category such as a financial contract supported by financial statements, records of withdrawal by corporate debtor, order of court/tribunal adjudicated upon non-payment of debt etc. as other documents that can be attached to application under Section 7 to prove existence of debt.

Moreover, the Supreme Court has, in the case of Swiss Ribbons (P) Ltd v. Union of India, enumerated eight classes of documents enumerated under Part V- Form 1 of AA Rules, 2016 as ‘other sources which evidence a financial debt.’

Section 215 is not mandatory in nature

The word ‘shall’ used in Section 215(b) of IBC makes it mandatory for the financial creditors to submit information to the IUs which is in contradistinction to ‘may’ used in Section 215 (c) for operational creditors.  The Calcutta High Court in Univalue Projects Pvt. Ltd. v. The Union of India & Ors. And Cygnus Investments and Finance Pvt. Ltd. & Anr.v. The Union of India & Ors., refuted the claim made on the grounds of interpretation of the provisions stating that Section 215(1) begins with stating ‘any person who intends to submit financial informationwhich implies that the intention of provision is not to make it mandatory to submit financial information to IU and the heading of any provision does not necessarily limit the scope of provisions thereunder. On a harmonious construction of Section 215 with Section 7 of IBC as well as the rules and regulations thereunder would also render the same opinion wherein submitting of any financial information with the IU is not a compulsory precondition for admission of application before the NCLT/NCLAT.

Conclusion

The basic aim of IBC as a legislation is not only to minimise the liquidation of corporate entities but also to ensure recovery of dues in a timely manner. The order passed by NCLT Delhi created an unnecessary barrier in the process of financial creditors’ filing of claim under IBC. It attempted to prove redundant the claims of those applications which are pre-existing and have been filed under Section 7 of the IBC, 2016  pending before the various Benches of the NCLT, prior to such final hearing of these applications. This leads to creation of new financial disabilities for the creditors and hence alters the rights available to it.  In the present case, the petitioner Cygnus Investment pressed writ petition citing urgency for initiating insolvency resolution process. Thus, ‘time’ being one of the most important criteria in recovery legislations, the said NCLT Order wrongly interpreted the provisions of IBC (say Section 7(3), Section 215 etc.) and clearly ignored the various methods of submitting records of evidence provided under the various rules and regulations thereunder.  An observation however made by the Court that under Section 215 even IBBI does not carry the power of retrospective rule making is something future discussions over the issue would provide better clarification. This is because the Court highlighted that the current order passed by the NCLT  (a delegate) is as per Section 240 of IBC whereby IBBI can formulate regulations of the nature of ‘delegated legislation’ and even IBBI has not been conferred with the power of retrospective regulation making thus rendering the impugned order promulgated by the NCLT is bad in law.

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