Sunday 8 November 2020

Univalue Projects Pvt. Ltd. Vs The Union of India & Ors - Record of Default from Information Utility.

High Court Calcutta (18.08.2020) in Univalue Projects Pvt. Ltd. Vs The Union of India & Ors. [W. P. No. 5595 (W) of 2020 With C.A.N. 3347 of 2020] held that;  The NCLT has acted without jurisdiction and exceeded its jurisdiction that is limited within the four corners of Section 424 of the CA, 2013 by passing the impugned order in violation of Section 7(3)(a) of the IBC, 2016. Furthermore, the impugned order is clearly in confrontation with Rule 4 of AA Rules, 2016 and Regulation 8 of the CIRP Regulations, 2016 and thereby defeats the very purpose for which the IBC, 2016 has been enacted.


Excerpts of the order;

# 1. These writ petitions have been filed by the petitioners under Article 226 of the Constitution of India, in which a stern challenge has been mounted to an impugned order dated May 12, 2020 issued by the Registrar of the National Company Law Tribunal (hereinafter referred to as “NCLT”) at its Principal Bench in New Delhi (hereinafter referred to as “Respondent No. 3”), that prime facie, appears to have been issued with the approval of the Hon’ble Acting President of the NCLT, New Delhi (hereinafter referred to as “Respondent No. 2”).


# 2. It appears that the order dated May 12, 2020 imposes a mandatory prescription on all financial creditors, as defined under the extant provisions of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC, 2016”) to submit certain financial information as a record of default before the Information Utility (hereinafter referred to as, “IU”) as a condition precedent for filing any new application under Section 7 of the IBC, 2016. The order further transcends to  impose this purported mandatory prescription retrospectively on all those applicants / financial creditors who have pre-existing applications filed under Section 7 of the IBC, 2016 and pending before the various Benches of the NCLT, prior to such final hearing of these applications.


# 5.  ……..   Based on the arguments advanced by both sides, I am framing the two main issues that need to be dealt with herein:

  • I. What is the scope of the powers of the NCLT and whether the exercise of the same in the impugned order May 12, 2020 is de hors the IBC, 2016 and the rules and regulations framed thereunder?

  • II. In the event the answer to the above is in the negative, whether the NCLT could enforce the same retrospectively thereby adversely affecting the rights of the petitioner No. 1 as a financial creditor under the extant provisions of the IBC, 2016?


# 14. Ms. Chatterjee, accordingly also relied on the NCLAT judgments of Neelkanth Township and Construction Pvt. Ltd. (supra) and Bharti Finance and Infrastructure Ltd. (supra) that have already held that submitting financial information before the IU cannot be a mandatory provision or the sole repository of a provision to prove the existence of a default in relation to a financial debt accrued to a financial creditor.


# 16. Hence, according to Ms. Chatterjee, Section 7(3)(a) of IBC, 2016 read with Regulation 8 of CIRP, 2016 coupled with Section 215(2) of IBC, 2016 with Regulation 20 of IU Regulations, 2017 makes it abundantly clear that the impugned order that has been issued by the NCLT is beyond its jurisdiction.


# 19. She cited the dictum of General Officer Commanding-in-Chief (General Officer Commanding-in-Chief –v- Subhash Chandra Yadav, AIR 1988 SC 876,) to state that two conditions must be fulfilled for a subordinate rule to have the effect of a statutory provision, namely: (a) such rule must conform to the provisions of the statute under which it is framed, and (b) it must also come within the scope and purview of the rule making power of the authority framing the rule.


# 20. It was Mrs. Bhuteria’s submission that if either of these two conditions are not satisfied, the subordinate rule so framed would be void. She placed her reliance on Sections 239 and 240 of the IBC, 2016 to drive home her point that only the Central Government and the IBBI had been conferred with rule-making and regulation-making powers respectively. She also placed her reliance on Indian Young Lawyers Association (Indian Young Lawyers Association –v- the State of Kerala & Ors.,(2019) 11 SCC 1,) to point out that a rule-making authority does not have the power to make a rule beyond the scope of the enabling law or inconsistent with the law. Add to this the scope of Section 424 of the CA, 2013, and it becomes apparent, in Mrs. Bhuteria’s opinion, that the President or the Registrar of the NCLT does not have the power to frame such a rule/ regulation.

 

# 38.  ….Therefore, what becomes clear to me is 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 CA, 2013 or the IBC, 2016, inclusive of any rules/ regulations made under the IBC, 2016 by the regulatory body, IBBI. Therefore, the powers of the NCLT and NCLAT is limited both by principles of natural justice as well as statutory provisions and regulations framed under such legislations.


# 43. What confounds me is that fact that the impugned order is silent on the enabling provision of law, that is, either the statutory or delegated source of power which enabled the NCLT to issue the order.


# 54. Therefore, based on the above discussion, I am of the view 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 IU OR any other document as specified which proves the existence of a financial debt.


# 60.  ….  The impugned order dated May 12, 2020 which abruptly imposed a mandatory prescription on financial creditors of adducing evidence of debt by way of only producing a record of default recorded with the IU, in my opinion, is a “prickly thorn” which not only goes against the principles of natural justice but also the statutory limitations inbuilt in Section 424 of the CA, 2013. The impugned order had become a fait accompli for the petitioners, which did indeed adversely affect their substantive rights as a financial creditor, as envisaged under the IBC, 2016. The very nature of the impugned order would create barriers for financial creditors and would leave them on the high seas as regards the corporate insolvency resolution process. Under the above circumstances it is apparent that the NCLT has acted without jurisdiction and exceeded its jurisdiction that is limited within the four corners of Section 424 of the CA, 2013 and Section 7(3)(a) of the IBC, 2016. Furthermore, the impugned order is clearly striking a discord with Rule 4 of AA Rules, 2016 and Regulation 8 of the CIRP Regulations, 2016. Hence, the impugned order is so patently without jurisdiction that it cannot be allowed to stand.


Accordingly, the first question is answered in the affirmative. The impugned order dated May 12, 2020 issued by the Principal Bench of the NCLT, is de hors the CA, 2013, the IBC, 2016 and the rules and regulations framed thereunder.


# 64. Section 240 of the IBC, 2016 which empowers the IBBI to make regulations (which are essentially to be characterized as ‘delegated legislations’) stipulates that such regulations must be consistent with the IBC, 2016 to carry out the provisions of the IBC, 2016 and upon such perusal comes across as silent when it comes to empowering the IBBI to make regulations which are retrospective in nature, therefore being in conformity with the ruling of the Supreme Court in Kanak Exports (supra). Therefore, any delegatee, let alone the NCLT, not even the IBBI can make regulations, by way of the impugned order or of such nature, to make a delegated legislation retrospective under the IBC, 2016. Therefore, the retrospective nature of the impugned order promulgated by the NCLT is bad in law and does in fact, create new disabilities for financial creditors, as is the case with the writ petitioner No. 1. Accordingly, the second question is answered in the negative.


# 67. Therefore, to summarize my conclusions:

  • a) The NCLT has acted without jurisdiction and exceeded its jurisdiction that is limited within the four corners of Section 424 of the CA, 2013 by passing the impugned order in violation of Section 7(3)(a) of the IBC, 2016. Furthermore, the impugned order is clearly in confrontation with Rule 4 of AA Rules, 2016 and Regulation 8 of the CIRP Regulations, 2016 and thereby defeats the very purpose for which the IBC, 2016 has been enacted.

  • b) I am of the view 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 IU OR any other document as specified which showcases the existence of a financial debt. Such other documents may belong to any of the four classes of documents stated in sub-regulation 2(b) of Regulation 8 of the CIRP, 2016 or as the Supreme Court has observed in Swiss Ribbons (P) Ltd. (supra), all the eight classes of documents stated in Part-V to Form-1 appended with the AA Rules, 2016.

  • c) Based on sub-paragraph (b) above, it may therefore be inferred that Section 215 of the IBC, 2016 is not mandatory in nature.

  • d) The NCLT could not exercise its inherent powers under Rule 11 of the NCLT Rules, 2016 to promulgate the impugned order dated May 12, 2020.

  • e) As far as the distinction that was sought to be drawn between substantive and procedural laws whereby the tribunal could regulate its own procedure, such powers of the tribunal regulated by a delegated form of legislation cannot rise above their source, that is the CA, 2013 and thereby obstruct the operation of a statutory provision of the parent Act (a substantive provision) and the Rules formulated thereunder. 

  • f) Any delegatee under the IBC, 2016, and the CA, 2013, that is, the Central Government, the IBBI and the NCLT cannot make regulations that have a retrospective effect.


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Disclaimer:

The sole purpose of this post is to create awareness on the "IBC - Case Law" and to provide synopsis of the concerned case law, must not be used as a guide for taking or recommending any action or decision. A reader must refer to the full citation of the order & do one's own research and seek professional advice if he intends to take any action or decision in the matters covered in this post.