Mandating the Filing of Default Record from Information Utility – Unwarranted and Unjustified
[By Ujjwal Agrawal]

The author is a student at Maharasthra National Law University, Nagpur

Introduction

Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC” or “the Code”) provides for the initiation of the Corporate Insolvency Initiation Process (“CIRP”) by the financial creditors of a corporate debtor. Furthermore, Section 7(3)(a) of the IBC mandates the filing of either ‘record of the default recorded with the information utility’ or ‘such other record or evidence of default as may be specified’. However, recently the National Company Law Tribunal (“NCLT”) passed a notification dated 12 May, 2020 which mandates the filing of default record from Information Utility (“IU”) thus, changing the directory condition as mentioned in Section 7(3) of the Code to a mandatory one.

An IU is defined under Section 3(21) of the IBC as a ‘person who is registered with the Insolvency and Bankruptcy Board of India (“IBBI”) Board as an information utility under Section 210 of the Code’. It is a network wherein the information relating to the financial data is stored. Its main objective is to provide a platform for submission and storage of financial information by entities, its authentication as well as access to this information as and when required. As of now, the National E-Governance Services Limited (“NeSL”) is the first and the only registered Information Utility with the IBBI owned by the State Bank of India and the Life Insurance Corporation among others.

Section 7(3) IBC – Mandatory or Directory?

Section 7(3) of the IBC uses the word ‘shall’ while mandating the requirement of record of default to be submitted along with the application to initiate the CIRP by the financial creditor, but the provision does not mention that it is mandatory to submit such record of default only after procuring it from the IU.

The Apex court in the case of Union of India v. A.K Pandey had interpreted the word ‘shall’ as – “it will always be presumed by the court that the legislature intended to use the words in their usual and natural meaning. If such a meaning, however, leads to absurdity, or great inconvenience, or for some other reason is clearly contrary to the obvious intention of the legislature, then words which ordinarily are mandatory in their nature will be construed as directory, or vice versa”.

Furthermore, the Supreme Court in 2005 had made a significant observation in the case of Kailash v. Nankhu with regards to the applicability of the procedural rules –   “All the rules of procedure are the handmaid of justice………….Unless compelled by express and specific language of the Statute, the provisions of the CPC or any other procedural enactment ought not to be construed in a manner which would leave the court helpless to meet extraordinary situations in the ends of justice”.

In the case of Shreenath v. Rajesh, the Apex court had made a relevant finding – “In interpreting any procedural law, where more than one interpretation is possible, the one which curtails the procedure without eluding the justice is to be adopted. The procedural law is always subservient to and is in aid to justice. Any interpretation which eludes or frustrates the recipient of justice is not to be followed”.

Thus, it is implied that the procedural requirements are not strictly mandatory in nature and could take a back seat in order to meet the ends of justice. They should not become an obstruction to justice, rather should aid to justice. Furthermore, the word ‘shall’ will not be construed as mandatory in nature in every circumstance but would depend on the intention of the legislature. The intention of the legislature is quite clear over here that the application for CIRP must be furnished along with any record of default and that could be either procured from the IU or any other means so as the default is proved.

In 2017, the Apex court in the case of Surendra Trading Company v. Juggilal Kamlapat Jute Mills Co. Ltd. & Ors was faced with an issue that whether the requirement of 7 days to cure the defect in application to initiate CIRP as mentioned in the proviso to Section 9(5) IBC is mandatory or directory in nature, to which the court held that it is a mere procedural requirement and cannot be held as mandatory in nature. Furthermore, in the case of Pioneer Urban Land & Infrastructure Ltd. v. Union of India, the Apex court observed that – “the absence of any consequences for infraction of a procedural provision implies that such a provision must be interpreted as being directory and not mandatory”.

Thus it is quite evident that such procedural requirement of filing of default record from IU is directory and should not have been made mandatory as even if furnishing the evidence of default from any other source would not lead to any prejudice to the other party.

NCLT’s Authority to issue such notification– Contrary to Parent Provision

Section 196(1) (t) of IBC authorizes IBBI to make regulations and guidelines on matters relating to insolvency and bankruptcy but nowhere mentions any such power to be with NCLT or its appellate body. Interestingly, the notification does not even mention the enabling provision through which the NCLT is issuing such an order but it can be presumed that NCLT invoked its inherent power mentioned in Rule 11 of the NCLT Rules, 2016 which authorizes the NCLT to issue such order to meet the ends of justice or to prevent abuse of the process of the Tribunal. However, it is a well settled position of law that any rule making power cannot restrict the provision of the enabling act. The Apex court in the case of State of Karnataka v. H. Ganesh Kamath[i] held that “it is a well settled principle of interpretation of statutes that the conferment of rule-making power by an Act does not enable the rule-making authority to make a rule which travels beyond the scope of the enabling Act or which is inconsistent therewith or repugnant thereto”.

Furthermore, in the case of Global Energy Ltd. v. Central Electricity Regulatory Commission it was held that – “the rule making power for carrying out the purpose of the Act is a general delegation. Such a general delegation may not be held to be laying down any guidelines. Thus, by reason of such a provision alone, the regulation making power cannot be exercised so as to bring into existence substantive rights or obligations or disabilities which are not contemplated in terms of the provisions of the said Act”.

Thus it is quite clear that the NCLT being the delegated authority cannot make any provision that runs contrary to the parent statute i.e. IBC. Furthermore, the notification also requires those applicants who have already filed their application but are pending for admission to furnish such records from the IU and thus making it retrospective which is not tenable in the eyes of law because in absence of any provision contained in the legislative Act, a delegatee cannot make a delegated legislation with retrospective effect.  

Conclusion

Section 7(3)(a) of IBC was read as directory but the notification dated 12 May, 2020 has now altered the provision making it mandatory, which surely is not the legislative intent, as is evident from the provision itself. The NCLT might have done so to regulate the legitimacy of such default records filed along with the application to initiate CIRP. However, such legitimacy could very well be checked through any other evidence as well and is thus not justifiable by the NCLT. Neither does the NCLT have the power to issue such notification nor is it in conformity with the IBC and thus making it vulnerable to be struck down. The notification has also mandated such filing for pending applications which are not yet accepted though might have submitted to NCLT thus making it retrospective as well which is not tenable in the eyes of law.

Thus for the foregoing reasons the notification is ultra vires Section 7(3) of IBC and the NCLT now may have to come up with either any clarification or amendment to the notification.

Endnote:

[i] State of Karnataka And Anr. vs H. Ganesh Kamath, 1983 SCR (2) 665

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