Calcutta HC Holds Nature Of Section 7(3)(A) Of The IBC To Be Directory

[By Soham Banerjee]

The author is an Associate (Dispute Resolution) at Vashi and Vashi – Advocates and Solicitors, Mumbai.

Introduction:

The National Company Law Tribunal (“NCLT”) by way of its Circular dated May 12, 2020 (“Impugned Circular”), directed all new and pending insolvency applications filed by Financial Creditors under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) to be mandatorily accompanied by a record of the Financial Default from an Information Utility (“IU”).

Accordingly, Univalue Projects Ltd. and Cygnus Investments and Finance Pvt. Ltd. (“Petitioners”) challenged the vires of the impugned Circular invoking the writ jurisdiction of the Calcutta High Court.

Grounds of Challenge:

Being Financial Creditors with a pending/prospective applications under Section 7 of the IBC, the Petitioners alleged that the impugned Circular would adversely affect the substantive and vested rights of the Petitioners that had accrued upon them as a creditor under the IBC, prior to the publication of the impugned Circular. Additionally, the Petitioners also claimed that the impugned Circular was issued in gross contravention of the IBC, the Companies Act, 2013 (“CA 2013”), and regulations under the Insolvency and Bankruptcy Board of India (“IBBI).

 Petitioner’s Submissions:

a)Kompetenz – kompetenz of the NCLT to issue the Circular

Section 424 of the CA, 2013 lays down the powers of the NCLT and the NCLAT. Accordingly, the Petitioner submitted that upon a bare reading of Section 424 of the CA, 2013, it is ex facie evident the scope of the NCLT’s jurisdiction is limited to the regulation of day to day procedure and such procedure that may be followed for the administration of justice. Section 424 of the CA, 2013 does not confer jurisdiction upon the NCLT to alter and/or contravene the basic structure of the CA, 2013, or the IBC.

b)Statutory interpretation of “as may be specified” under Section 7(3)(a)

Attention was drawn to Section 3(32) of the IBC on the definition of the term ‘specified’ which means specified by regulations made by the IBBI. Accordingly, relying on the term “as may be specified” under Section 7(3)(a) of the IBC, the Petitioners submitted that the power to make regulations under Section 7 of the IBC vested with the IBBI and not the NCLT.

c)Presumption of implied delegated legislation

The Petitioners submitted that where a statute expressly provides for delegation of power to a subordinate authority, exclusive jurisdiction vests with that subordinate authority to make rules and regulations under the statute. Accordingly, since the IBC had expressly delegated the power to make regulations to the IBBI, the NCLT traversed beyond the ambit of the statute in issuing the impugned Circular.

d)Disjunctive nature of Section 7(3)(a)

The Petitioners submitted that Section 7(3)(a) of the IBC envisaged proof of financial default through other modes of documents and evidence. Attention was drawn to the usage of the term “or” in Section 7(3)(a) of the IBC to argue that the intention of the legislature was to make Section 7(3)(a) disjunctive, and not limit proof of financial default to only furnishing of record of default with the IU.

Reliance was also placed on Regulation 8(2) of the IBBI Regulations, 2016 to highlight that the said regulation also lists four other categories of documents, in addition to the record of default with the IU to establish financial default.

e)Inherent powers of the NCLT and AA Rules, 2016

In conclusion, the Petitioners pre-emptively submitted that even under the NCLT’s inherent jurisdiction under Rule 11 of the NCLT Rules, 2016, the NCLT could not have issued the impugned Circular. A comparison was made with Section 151 of the Code of Civil Procedure, 1908 (inherent powers of a Civil Court) to submit that even a Civil Court cannot resort to its inherent jurisdiction to issue rules and regulations, ultra vires the parent statute [See KK Veluswamy v. N. Palanisami, (2011) 11 SCC 275].

Additionally, reliance was also placed on Rule 4(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (“AA Rules, 2016”), which deals with procedural aspects of an application filed by a Financial Creditor. It was contended that the ‘Form – I’ which had to be filed along with the documents evincing financial default also made provision for accommodating other sources of documents and evidence, apart from the record of default with the IU.

Respondent’s Submissions:

Per contra, the Respondent argued that Section 424 of the CA, 2013 vested NCLT with the jurisdiction to regulate their own procedure. Further, the Respondent raised strong objections to the furnishing of record of default with the IU as a mere formality and contended that it was an essential feature of the IU to authenticate and verify the information submitted by a financial creditor.

Additionally, the Respondent also argued that new disabilities and/or obligations have not been foisted upon financial creditors by way of the impugned Circular since Section 7(3)(a) of the IBC specified, at the outset, that a financial creditor is required to submit the record of the default with the IU, along with the application. Since there exist no specific regulations that govern the submission of other evidence/documents as proof of financial default, the record of default to be furnished to the IU is the only way to establish financial default, and hence mandatory.

Findings:

a)On jurisdiction of the NCLT:

On the NCLT’s jurisdiction to publish the impugned Circular, reliance was placed on Government Of Andhra Pradesh & Ors v. Smt. P. Laxmi Devi [(2008) 4 SCC 720] to expound upon the hierarchy of legal norms when it comes to rules and regulations governing the field of Insolvency laws, as under:

(i)Provisions of the CA, 2013 and IBC;

(ii)Rules enacted by the Central Government and regulations made by the IBBI; and

(iii)NCLT/NCLAT regulating their own procedure subject to Section 424 of the CA, 2013

(iv)Accordingly, while the NCLT has been vested with the jurisdiction to regulate its own procedure, such regulations are subservient to the provisions of the CA, 2013, the IBC, and regulations made by the IBBI

b) On implied delegated legislation:

Relying on Indian Young Lawyers Association v. The State of Kerala, the Court held that where a rulemaking power has been conferred by statute on a delegate, the delegate cannot make rules contrary to the provisions of the parent legislation. Accordingly, even if one were to assume that the NCLT was the rulemaking body under the IBC, the sweeping scope of the impugned Circular makes it inconsistent with the CA, 2013, and the IBC.

c) On interpretation of Section 7(3)(a)

Upon a bare perusal of Section 7(3)(a), the Court was of the opinion that the nature of the clause is disjunctive in nature and the usage of the word “or” makes the following documents admissible as evidence of proof of financial default:

(i)Record of default with the IU;

(ii)Such other record; and

(iii)Evidence of default as may be specified.

Accordingly, the furnishing a record of default with the IU was not the only means by which financial default could be established and hence, was not to be read as a mandatory prescription against admission of Section 7 applications.

d)Extant regulations on other evidence/document as proof of financial default

Countering the Respondent’s submission on the lack of regulations governing the furnishing of other evidence/documents as proof of financial default, attention was drawn to the Supreme Court’s ruling in Innoventive Industries v. ICICI Bank and Swiss Ribbons (P) Ltd. v. Union of India to hold that Form – I appended to Rule 4(1) of the AA Rules, 2016 expressly classify eight other sources of documents which can be relied upon as evidence determining financial default. Accordingly, a Section 7 Application could not be said to be incomplete upon the Financial Creditor merely not furnishing the record of default with the IU. 

Comment:

It would be interesting to note that the NCLAT by way of its judgment in Neelkanth Township & Construction Pvt. Ltd. v. Urban Infrastructure Trustees Ltd. [i] had held that the provisions of Section 7(3)(a) of the IBC are merely directory in nature. Accordingly, the impugned Circular had created a unique situation where the Courts and the Legislature were looking at the same provision from different perspectives. The instant ruling therefore effectively de – clogs the insolvency framework and will allow pending applications to proceed within an expeditious manner.

Under circumstances in which the NCLTs and NCLAT are already functioning at a very limited capacity, the instant ruling clears a path for summarily rejecting technical objections to Section 7 applications taken by Corporate Debtors, at the threshold. Since the pith and substance of an inquiry in a Section 7 application is to merely ascertain the existence of financial default, interpreting Section 7(3)(a) as a directory will allow Courts to limit their inquiry to the ascertainment of default, without having to go into complicated questions of fact and engaging in a drawn-out litigation at the stage of admission.

Endnotes:

[i] Company Appeal (AT) (Insolvency) No. 44 of 2017 dated August 11, 2017.

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