"Creditor has the incentive to close out its investment quickly so as to avail of alternative investment opportunities. The debtor on the other hand has the incentive to hold on to the assets" [1]Gathering and Preservation of information is a challenge especially when there are conflicting forces, each trying to present it in a manner to suit their own interest. Banks have been facing...
"Creditor has the incentive to close out its investment quickly so as to avail of alternative investment opportunities. The debtor on the other hand has the incentive to hold on to the assets" [1]
Gathering and Preservation of information is a challenge especially when there are conflicting forces, each trying to present it in a manner to suit their own interest. Banks have been facing this challenge in recovering their dues while courts applied the strict regimes under Indian Evidence Act, 1872. Exemption granted under the Bankers' Books of Evidence Act, 189,1 served a limited but important purpose of copies of Bankers's books being admitted in evidence. Information Technology Act, 2000 enabled admission of electronic books in evidence. This process consumed huge amount of time and resources both manpower and finance. It was acknowledge under the T K Vishwanathan Committee Report that "Under the present arrangements, considerable time can be lost before all parties obtain this information. Disputes about these facts can take up years to resolve in court. The objective of an IRP that is completed in no more than 180 days can be lost owing to these problems. Hence, the Committee envisions a competitive industry of "information utilities‟ who hold an array of information about all firms at all times. When the IRP commences, within less than a day, undisputed and complete information would become available to all persons involved in the IRP and thus address this source of delay". Thus the key to timely completion of Insolvency Resolution Process (IRP) was availability of true, undisputed and quick information with the parties concerned.
The Committee suggested introduction new institution of Information Utilities (IUs). IUs along with National Company Law Tribunal (NCLT), Insolvency Professional and Creditors' Committee formed one of the pillars of the process under the Insolvency and Bankruptcy Code, 2016 (IBC) and the last one to be put into operation.
National E-Governance Services Limited (NeSL) was the first Information Utility to be registered with the Insolvency and Bankruptcy Board of India (IBBI) to serve as a repository of information pertaining to any debt/claim/default to facilitate time bound resolution by providing verified information to adjudicating authorities without further authentication.
Why IUs: Challenges thrown open by rising NPA and absence of centralized information in the Banking sector about delinquency led to setting up of working group[2] under the Chairmanship of Shri N.H. Siddiqui, Chief General Manager, Deportment of Banking Operations & Development. Central Office. Reserve Bank of India, in 1999. Based on its report credit information companies (CIC) were established. The Credit Information Bureau (India) Ltd. (CIBIL) was first company which was set up in year 2000 and launched its operations in April 2004. Following enactment of the Credit Information Companies (Regulation) Act in 2005, three other Credit Information Companies (CICs) were also set up. Subsequently, RBI in March 2013 constituted another Committee under the chairmanship of Shri Aditya Puri, MD, HDFC Bank to examine reporting formats used by CICs and other related issues. The Committee submitted its report on January 31, 2014 which lead to standardization of data formats for reporting corporate, consumer and MFI data by all credit institutions and streamlining the process of data submission by credit institutions to CICs. Banks and All-India Financial Institutions were directed to report non-suit filed accounts in respect of wilful defaulters (Rs 25 lakh and above) and defaulters (Rs 1 crore and above) to the CICs. Further, in the year 2015 all credit Institutions were directed by RBI to become members of all the CICs and submit current and historical data about specified borrower to them and to update it regularly.
Central Repository of Information on Large Credits (CRILC)[3] was set up by RBI to collect, store and disseminate data on all borrowers' credit exposures including Special Mention Accounts (SMA 0, 1 & 2) having aggregate fund-based and non-fund based exposure of Rs.50 million and above. Lenders were also advised to report separately to CRILC, under two categories i. CRILC-Main (Quarterly Submission): Comprise of four sections i.e. Section 1: Exposure to Large Borrowers (Global Operations), Section 2 - Reporting of Technically/Prudentially Written-off Accounts (Global Operations), Section 3 - Reporting of Balance in Current Account (Global Operations) and Section 4: Reporting of Non cooperative Borrowers (Global Operations) and Secondly, ii. CRILC-SMA 2 and JLF Formation (Submission on 'as and when' basis): whenever a large borrower's account becomes overdue for 61 days and/or a Joint Lenders Forum (JLF) is formed in respect of a SMA 2 classified borrower[4].
However, the basic purpose of setting up of the above regime was to reduce information asymmetry for improved credit risk assessment and improve recovery climate and information available with CICs was never intended to have any additional evidentiary value or to serve as prima facie evidence of the transaction/default.
The things, however, started moving towards more evidentiary centric organizations in the form of Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) which was set up and become operational on 31 March 2011, under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002[5] (SARFAESI Act). It was set up to provide a platform for filing registrations of transactions of securitization, asset reconstruction and security interest created in favour of the banks and financial institutions by all types of mortgages and in units under constructions besides filing of Security Interests in movables, intangibles and factoring transactions.
Similarly, under the Factoring Regulation Act, 2011[6], every factor is under obligation to file the particulars of every transaction of assignment of receivables in his favour with the Central Registry of CERSAI.
Again, this was basically to prevent frauds involving multiple lending against the security of same property as well as fraudulent sale of property without disclosing the security interest over such property. Further, information available with CERSAI is not immune to admissibility test under Indian Evidence Act, 1872.
Setting up of IUs marked a shift as information as well as default filed with IUs are to be treated as prima facie evidence of the transaction for the purpose of proceedings under IBC, thus, freeing IRP process from the rigor of evidentiary regime thereby enabling completion of process within a time bound manner as laid down under IBC.
How it impact the Resolution Process: IUs are defined under IBC[7] to means "a person who is registered with the Board as an information utility under section 210". The "core services"[8] rendered by an information utility include(a) accepting electronic submission of financial information in such form and manner as may be specified; (b) safe and accurate recording of financial information; (c) authenticating and verifying the financial information submitted by a person; and(d) providing access to information stored with the information utility to persons as may be specified.
Financial information[9], in relation to a person, mean one or more of the following categories of information, namely:— (a) records of the debt of the person; (b) records of liabilities when the person is solvent; (c) records of assets of person over which security interest has been created; (d) records, if any, of instances of default by the person against any debt; (e) records of the balance sheet and cash-flow statements of the person; and (f) such other information as may be specified. Thus, information available with IUs are of very wide nature and cover both solvent and insolvent stage and includes entire gamut of financial information.
Information to be filed with IUs: It would include the information filed by the debtor in the form of financial statement/ borrowing. And includes information filed by lenders such as sanction/disbursement/ security interest held by it over the assets of debtor/guarantor, maturity of debt/ renewal/repayment schedule of debt/ rate of interest/details of terms/ balance confirmation/ proof of debt and charge (filing of copy of loan agreement/ repayment schedule/balance confirmation/ balance sheet/cash flow statements/and other evidence/ security documents)/ type of charge /assets on which charge is created/ and modification of such information from time to time/ default/last payment/suit filed and such proof etc.
All transactions of additional finance/ re-schedulement / restructuring will also have to be filed with IUs if the same are to be saved from being declared as preferential payments[10]. As a transfer of property or an interest thereof of the corporate debtor for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor; and which has the effect of putting such creditor or a surety or a guarantor in a beneficial position than it would have been in the event of a distribution of assets being made in accordance with section 53 (3) of IBC, would need to be registered with IUs.
Any alleged preference transaction could be saved provided (a) transfer is made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee; (b) any transfer creating a security interest in property acquired by the corporate debtor to the extent that— (i) such security interest secures new value and was given at the time of or after the signing of a security agreement that contains a description of such property as security interest and was used by corporate debtor to acquire such property; and (ii) such transfer was registered with an information utility on or before thirty days after the corporate debtor receives possession of such property.
Operational creditor may also have to submit similar information about its transaction with its debtor[11]. The information regarding all invoices lodged with the debtor can be submitted to IU which would be required to be authenticated by the debtor.
Operational Creditor providing services / supply of goods to a particular Corporate Debtor involving multiple invoices, can submit consolidated data/ information / documents to an IU. The information available with IU would serve as evidence of transaction and default before the Adjudicating Authority. As per sub rule 5(3) of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, a copy of demand notice or invoice demanding payment served by the operational creditor shall also be filed with the information utility. Concurrent to the above process, the documents relating to Operational Debt viz., a statement of details of sales invoices pending for payment to arrive at the total operational debt outstanding, Sale Contract Agreement between the Corporate Debtor and Operational Creditor, Covering Letters to Invoices, other correspondence/letters, if any, also needed to be uploaded electronically through the system by affixing Digital Signature of the entity/ e- signature of the authorized person.
There is only one common form i.e. Form No.3 which is to be filed along with copy of an invoice attached with a notice in Form 4 as per Rule 5(1) of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.
Resolution Professional and Liquidators : Under section 18 of IBC, interim resolution professional are required to file information collected by it relating to activities/ finance of the debtor with the information utility. Similarly, section 36 requires a liquidator to form liquidation estate in relation to the corporate debtor comprising of all liquidation estate assets which shall include the any assets over which the corporate debtor has ownership rights, including all rights and interests therein as evidenced in the balance sheet of the corporate debtor or an information utility or records in the registry or any depository recording securities of the corporate debtor or by any other means as may be specified by the Board, including shares held in any subsidiary of the corporate debtor.
A liquidator shall have the power to access any information systems for the purpose of admission and proof of claims and identification of the liquidation estate assets relating to the corporate debtor from the information utility.[12]
Fast track process under section 57 of IBC is also required to be supported with the proof of the existence of default as evidenced by records available with an information utility. Similarly, Fresh Start Process under section 99 of IBC, also lay down that where the debt for which an application has been filed by a creditor is registered with the information utility, the debtor can ot be dispute the validity of such debt.
Evidentiary value of the information with IUs: Under section 7 of IBC, a financial creditor has to furnish record of the default recorded with the information utility. The Adjudicating Authority will also ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor under sub-section (3). A financial creditor has to support its claim before the liquidator by providing a record of such claim with an information utility[13].
Under section 52 of IBC, a secured creditor in the liquidation proceedings may— (a) relinquish its security interest to the liquidation estate and receive proceeds from the sale of assets by the liquidator in the manner specified in section 53; or (b) realise its security interest outside liquidation process with prior permission of the Liquidator who would verify such security interest and permit the secured creditor to realise only such security interest, the existence of which is proved either by the records of such security interest maintained by an information utility; or by such other means as may be specified by the Board.
The information lodged with IUs form the basis of filing of application and authentication of information and also eventual enforcement of security interest. Any defect in information would put the party in difficult position before the Adjudicating Authority and Liquidator and may lead to dispute. Therefore, it is critical for any party to ensure that the proper information is filed with IU and it is also duly authenticated by the debtor.
Authentication of Information[14] : Authentication of information filed with IU form a very critical part of admissibility of the information under IBC. Section 214 of IBC requires that before the information as received from various persons is stored by IU it needs to be authenticated by all concerned parties. This information may be further modified or rectified for under section 215, by moving an application to the information utility for such purpose stating reasons therefore.
Process of registration/filing/authentication of the information with IUs: Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017 (Regulations) has laid down procedure to govern the gamut of filing, authentication and access of the records with IU.
Registration: All entities related to debt information which are required to be registered with IU under the Regulations, like Banks, FIs, NBFCs, Corporate, Firms, Borrower/Co-Borrower/Guarantors and third party Security Providers are to first get registered with IU. For this purpose they have to appoint authorized representative/Super User (by way of supporting relevant document) who would then deal with IU. The user would be authenticated by following Aadhar authentication process. Once validated, the user would file required information in online process. After verification of the information and document by IU, the entity is registered and information verified with mail to super user/sms for user ID and password.
Process for filing, acceptance and receipt of information: Under sub-regulation 20 of the Regulation, information is to be submitted by a user in 'Form C' given in the Schedule to the Regulations. On receipt of the information submitted under sub-regulation (1), the information utility will (a) assign a unique identifier to the information, including records of debt; (b) acknowledge its receipt, and notify the user of the unique identifier of the information and the terms and conditions of authentication and verification of information.
This is followed up with email to the related party who is required to authenticate the information. Again, such authenticating entity has to get itself registered with IU, map the debt information and then authenticate or dispute the transaction. The process require use of digital signature or aadhar e-sign.
On completion of the processes of authentication and verification under sub-regulation (1) of Regulation 21, the information utility will communicate the information and the status of authentication to registered users who may be creditors of the debtor/ sureties.
Storage of information[15]. The information has to be compulsorily stored within India and is governed by the laws of India.
Access to information: Information can be accessed by the user which has submitted the information; all the parties to the debt and the host bank, if any, if the information is of the categories in section 3(13)(a), (c) and (d); (c) of IBC, the corporate person and its auditor, if the information is of the categories in section 3(13)(b) and (e); (d) the insolvency professional, to the extent provided in the Code; (e) the Adjudicating Authority (f) the Board; (g) any person authorised to access the information under any other law; and (h) any other person who the persons referred to in (a), (b) or (c) have consented to share the information with. User will be able to view (a) the date the information was last updated; (b) the status of authentication; and (c) the status of verification while providing access to the information. The information could be accessed by users with any information utility, which they are entitled to access, but they would have access to information available with all IUs subject to privacy and confidentiality of information. User can get an annual statement of all information pertaining to the user, free of charge.
User will be provided functionality to mark information as erroneous and correct it. Sub-Regulation 26 of the Regulation provide for porting information from registries. IU can import information from such registries.
Thus, IU, not only act like a credit repository but it accept financial information from borrower, financial creditors and operational creditors get authenticated by all the parties of the debt and store to be used as evidence in the legal process. The authenticated information serves as proof of borrowing, debt, security interest, default, thereby reduces asymmetry of information, information-collection time, delays in legal process
Here it needs to be noted that authenticating process also contain an option for authenticating entitity to review and affix his remarks item-wise for the data, while authenticating the information furnished by an Information Utility. Such disputed details would be referred back to financial creditor/banks for resolution. Further, if a Corporate Debtor does not authenticate the Debt information or Default in an account such information which is pending for authentication beyond 7 days are referred back to Financial Creditor/Banks for resolution.
If seen from operation angle, this adds additional process for lenders who are already filing information relating to charge creation with ROC, CERSAI, RTO, Sub-Registrar, RBI, CIC etc. However, for operational creditor it sets up a new regime for registration of transactions and contracts. Since, authentication of information is critical for acceptance of information, lenders would have to make it obligatory on the borrower/ guarantor/ third party security provider by inserting suitable clauses in the loan documents. While authentication of the lending/loan documents would be a normal exercise given the fact that borrower would be keen to avail disbursement out of the loan but authentication of disbursement/default would pose a real challenge. Perhaps the lenders/operational creditors would have to devise innovative procedure or use relevant technology to ensure due authentication by the related party.
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[1] The report of the Shri T K Vishwanathan Committee on Bankruptcy Law Reforms Volume I: Rationale and Design
[2] Working Group under chairmanship of Shri N.H. Siddiqui ( Chief General Manager,. Deportment of Banking Operations & Development. Central Office. Reserve Bank of India) set up by the Reserve Bank in 1999
[3] RBI Notification No.RBI/2013-14/601 dated May 22, 2014
[4] Under section 45(L) of the RBI Act, 1934
[5] section 20 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002)
[6] Rule 3 of the Registration of Assignment of Receivables Rules, 2012 read with Section 19 of the Factoring Regulation Act, 2011
[7] Section 3 (21) of IBC
[8] Section 3 (9) of IBC
[9] Section 3 (13) of IBC
[10] Section 43 IBC
[11] Section 215 of IBC
[12] Section 33 of IBC
[13] Section 38 of IBC
[14] Section 214 of IBC
[15] Sub-Regulation 22 of Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017