Vipul Himatlal Shah Vs. Teco Industries - In case the record of Information Utility shows that there is a debt which is in default, the Adjudicating Authority or the Appellate Authority are not required to further examine the record maintained by the Information Utility.

 NCLAT (18.05.2022) in Vipul Himatlal Shah Vs. Teco Industries  [Company Appeal (AT) (Insolvency) No. 470 of 2022] held that;

• In case the record of Information Utility shows that there is a debt which is in default, the Adjudicating Authority or the Appellate Authority are not required to further examine the record maintained by the Information Utility,

Excerpts of the order;

This appeal has been preferred by the Appellants under section 61 of the Insolvency and Bankruptcy Code, 2016 (hereinafter called ‘IBC’) challenging the order dated 16.3.2022 (hereinafter called ‘Impugned Order’) passed by the Adjudicating Authority (National Company Law Tribunal, Ahmedabad) in CP(IB) No. 177/NCLT/AHM/2020 dismissing application under section 7 filed by the Respondent No.1.

 

# 4. The Appellants have also claimed that Respondent No. 1 issued a demand notice under section 8 of the IBC to which the corporate debtor responded vide communication dated 11.1.2020 refuting the claim for repayment of loan. Thereafter Respondent No. 1 filed an application under section 7 of IBC against the corporate debtor regarding the default in repayment of financial debt on 4.2.2020 which after due consideration by the Adjudicating Authority was admitted vide the Impugned Order.

 

# 5. We heard the arguments of the Learned Counsel for Appellants and Learned Senior Counsel for Respondents and also perused the record.

 

# 6. The Learned Counsel for Appellant has argued that the record of information utility National E-Governance Services Limited (in short ‘NESL’) on whose basis the financial debt in question was taken to be due for payment to the financial creditor and in default contained incorrect e-mail ID of the corporate debtor. He has argued that regulation 21 of the Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017 stipulates the process of authentication and verification of information of debt and default. He has further argued that in accordance with regulation 21(2)(c), the debtor has to deliver the information of default or reminder, either by hand, post or electronic means at the postal or e-mail address of the debtor, which was not done by the information utility. He has further claimed that the e-mail ID of the Corporate Debtor is present in the MCA records but instead of using the correct email id of the corporate debtor the e-mail ID used by the information utility was tushar.shah@superwireex.com and vipul.shah@superwireex.com, both belonging to directors of the corporate debtor whose email IDs were different than that of the corporate debtor. He has also urged that the amount of Rs. 19,40,81,000 transferred by the Respondent No. 1 to the corporate debtor was actually part advance of a total promised investment of Rs. 50 crores in the corporate debtor by Mr. Ambrish L. Shah and since he did not invest the full amount, the shares were not transferred in his name against the invested amount. He has thus claimed that the amount due to the corporate debtor is certainly not a financial loan as it was meant to be an investment and also, therefore, did not have any interest levied on it, something which the information utility has assumed on the basis of wrong and misleading information provided by the financial creditor Teco Industries. He has buttressed his argument of the said amount not being a financial loan by stating that since Respondent No. 1 did not invest the full promised amount of Rs. 50 cores, the corporate debtor which had made extensive plan for expansion of infrastructure and capital goods suffered severe financial stress. He has claimed that, therefore, the corporate debtor filed a civil suit in the year 2018 bearing Civil Suit No. 977 of 2018 before Hon’ble City Civil Court of Ahmedabad for declaration and damages, which is pending. He has, therefore, claimed the transaction entered into between the parties is not covered under the definition of ‘financial debt’ under section 5(8) and any of the nine clauses of section 5(8) to be in the nature of financial debt.

 

# 7. The Learned Counsel for Appellant has referred to the judgment dated 11.1.2022 of this tribunal in the matter of Rushabh Civil Contractors Pvt. Ltd. vs. Centrio Lifespaces Ltd. (MANU/NL/0031/2022) to claim that any debt which is disputed cannot form the basis for admission of section 7 application.

 

# 8. The Learned Senior Counsel for Respondent No. 1 has argued that in the reply of the corporate debtor in response to section 7 application (attached at pp.83-93 of the appeal paperbook vol.I), the corporate debtor has nowhere stated that it did not receive the e- mail sent for authentication and verification by the Information Utility ((NeSL). Therefore, the lack of reply by the corporate debtor to information utility’s email has led to deemed confirmation of the financial debt. He has referred to regulation 21 of the Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017 to claim that once an e-mail is sent to the corporate debtor regarding the information of default or a reminder thereon, there is three strike rule and if the debtor does not respondent even after three reminders, the information available with the Information Utility is deemed to be authenticated and verified by the corporate debtor. He has clarified that the notice was sent to both the directors of the corporate debtor, namely Vipul Himatlal Shah and Tushar Himatlal Shah, who are owners of the corporate debtor and they did not respond to the e-mail of Information Utility and hence the authentication of the loan by the respondent no. 1 to the corporate debtor was established.

 

# 9. The Learned Senior Counsel for Respondent No. 1 has further referred to Part II of section 9 application (attached at pg. 78 of the appeal paperbook, vol.I), wherein the authorized share capital of the corporate debtor is stated as Rs. two crores only and the paid up share capital is stated as Rs.1,99,95,540/- only, and therefore it is completely illogical that when the share capital is almost fully subscribed a fresh investment of Rs. 50 crores could be made. He has also pointed out that in the ledger account of the financial creditor maintained by the corporate debtor (attached at pgs. 50-51 of the copy of section 7 application filed vide dy. No. 35553 dated 30.4.2022), the corporate debtor has itself shown that the account of Teco Industries is a loan account. He has referred to para 28 of the judgment of Hon’ble Supreme Court in the matter of Innoventive Industries vs. ICICI Bank [2018 1 SCC 407] to underline that in the face of authenticated record of Information Utility, the fact of financial debt is established.

 

# 10. The Learned Senior Counsel for Respondent No. 1 has also argued that in case the corporate debtor had any grievance regarding any record/entry in Information Utility’s record, it could have taken appropriate action under the Grievance Redressal Policy, which is provided in Regulation 12 of the Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017, and since it was not resorted to by the corporate debtor the deemed authentication of the loan record is established. He has finally urged that the claim that the said money was not given on loan but as part payment against the investment in the corporate debtor is a figment of imagination created by the Appellants to escape from the corporate debtor’s liability.

 

# 11. The relevant provisions relating to definition of ‘financial debt’ as given in section 5 (8) of the IBC is as follows:-

“5(8) “financial debt” means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes–

(a) money borrowed against the payment of interest;

(b) any amount raised by acceptance under any acceptance credit facility or its dematerialised equivalent;

(c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;

(d) the amount of any liability in respect of any lease or hire  purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed;

(e) receivables sold or discounted other than any receivables sold on non-recourse basis;

(f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;

[Explanation. -For the purposes of this sub-clause, –

(i) any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and

(ii) (ii) the expressions, “allottee” and “real estate project” shall have the meanings respectively assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);]

(g) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account;

(h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;

(i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clause (a) to (h) of this clause;”

 

# 12. The regulations relevant to this appeal are Regulations 20 and sub-regulations (2) and (3) of regulation 21 of the Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017, which are reproduced below:-

“20. Acceptance and receipt of information –

(1) An information utility shall accept information submitted by a user in Form C of the Schedule.

(2) On receipt of the information submitted under sub-regulation (1), the information utility shall-

(a) assign a unique identifier to the information, including records of debt;

(b) acknowledge its receipt, and notify the user of-

(i) the unique identifier of the information;

(ii) the terms and conditions of authentication and verification of information; and

(iii) the manner in which the information may be accessed by other parties.

21. Information of default.

xx xx xx xx

(2) For the purpose of sub-regulation (1), the information utility shall-

(a) deliver the information of default to the debtor seeking confirmation of the same within the time specified in the Technical Standards;

(b) remind the debtor at least three times for confirmation of information of default, in case the debtor does not respond, allow three days each time for the debtor to respond;

(c) deliver the information of default or the reminder, as the case may be, to the debtor either by hand, post or electronic means at the postal or e-mail address of the debtor-

(i) registered with the information utility by him, failing which,

(ii) recorded with any other statutory repository as approved by the Board, failing which,

(iii) submitted in Form C of the Schedule.

(3) On completion of the process under sub-regulation (2), the information utility shall record the status of authentication of information of default as indicated in the Table below:

 

Sl. No.	Response of the Debtor	Status of Authentication	Colour of the Status
	Debtor confirms the information of default	Authenticated	Green
	Debtor disputes the information of default	Disputed	Red
	Debtor does not respond even after three reminders	Deemed to be Authenticated	Yellow

 

# 13. We note that the claim put forth by the Learned Counsel for Appellants, that the amount in question of Rs.19,40,81,000/- being actually a part payment against the total investment of Rs. 50 crores, is not supported by any document or record. On the contrary the record maintained by the Information Utility NESL shows that the loan of Rs.19,40,81,000/- was given by the financial creditor to the corporate debtor at 14% rate of interest and an amount of Rs.26,49,46,085/- is outstanding (attached at pp.74-75 of the appeal paperbook, Vol.I). We find that in the section containing contact details of the debtor, the e-mail IDs of Mr. Tushar Himatlal Shah and Mr. Vipul Himatlal Shah are given. On this fact that the emails were not addressed to the corporate debtor and hence he had no chance to authenticate the information utility’s record, we note that the Appellants have not disputed the fact of receiving the e-mails. Additionally, they chose to neither reply to the said e-mail nor forwarded them to the appropriate addressee. Such neglect in the face of the fact that as directors of the corporate debtor they were connected to and in responsible position in management of the corporate debtor, they cannot now take such a weak defense which is wholly untenable. Such an inference also comes out from regulation 21(3) of the Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017 which provides that if the debtor does not respond even after three reminders, the information of default is deemed to be authenticated. Moreover, we note that the corporate debtor or its authorized representative did not take any action under Grievance Redressal Policy under regulation 12 of the Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017 to set the record straight in case it found it to be incorrect. On the basis of these facts and analysis we are inclined to hold that the corporate debtor cannot deny the existence of a financial debt as defined in section 5(8) of the IBC as present in the record of the information utility.

 

# 14. We have also noted that the authorized share capital of the corporate debtor is Rs. 2 crores (in part II of Section 7 application at page 78 of appeal paperbook, Vol.I) and that the paid up share capital is Rs. 1,99,95,540.00. It therefore belies commonsense, logic and legal provisions that a further investment of Rs. 50 cores and a part payment of over Rs. 19 cores could have been made as investment with a purported transfer of 49% shareholding to the financial creditor as alleged by the Appellants without the authorized share capital of the corporate debtor being in a position to accommodate such an investment.

 

# 15. We also note the judgment of Hon’ble Supreme Court in the matter of Innoventive Industries vs. ICICI Bank (2018) 1 SCC 407, wherein in para 21 it is held as follows:-- 

• “21. Section 12 provides for a time limit for completion of the insolvency resolution process and reads as follows: “Sec. 12. Time-limit for completion of insolvency resolution process.- (1) Subject to sub-section (2), the corporate insolvency resolution process shall be completed within a period of one hundred and eighty days from the date of admission of the application to initiate such process. (2) The resolution professional shall file an application to the Adjudicating Authority to extend the period of the corporate insolvency resolution process beyond one hundred and eighty days, if instructed to do so by a resolution passed at a meeting of the committee of creditors by a vote of seventy-five per cent. of the voting shares. (3) On receipt of an application under sub-section (2), if the Adjudicating Authority is satisfied that the subject matter of the case is such that corporate insolvency resolution process cannot be completed within one hundred and eighty days, it may by order extend the duration of such process beyond one hundred and eighty days by such further period as it thinks fit, but not exceeding ninety days: Provided that any extension of the period of corporate insolvency resolution process under this section shall not be granted more than once.”

 

# 16. In the light of the detailed discussion as above, it is clear that in case the record of Information Utility shows that there is a debt which is in default, the Adjudicating Authority or the Appellate Authority are not required to further examine the record maintained by the Information Utility, moreso when the record of the Information Utility is deemed authenticated and no dispute or refutation of said record has been done by the corporate debtor earlier. We also note that in the judgment of Rushabh Civil Contractors Pvt. Ltd. vs. Centrio Lifespaces Ltd. (supra), which has been cited by the Learned Counsel for Appellant, the record that formed the basis for financial debt and default was found to be forged and fabricated, which is not the case in the present appeal. Therefore, this judgment does not come to the rescue of the Appellant.

 

# 17. In view of the detailed discussion in the aforesaid paragraphs, we are of the opinion that the Adjudicating Authority has not committed any error in admitting the section 7 application filed by the financial creditor M/s. Teco Industries. The appeal is therefore dismissed as being devoid of merit and disposed of accordingly.

 

# 18. In the facts of the case, there is no order as to costs.

 

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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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