IBC: Calcutta HC Quashes NCLT Order Mandating Submission Of Record Of Default For Filing Sec 7 Applications [Read Judgment]

"All concerned are directed to file default record from Information Utility along with the new petitions being filed under section 7 of Insolvency and Bankruptcy Code, 2016 positively. No new petition shall be entertained without record of default under section 7 of IBC, 2016.

The Authorized Representatives/Parties in the cases pending for admission under aforesaid section of IBC also directed to file default record from Information Utility before next date of hearing."

The single judge bench of Justice Shekhar B. Saraf stated that the impugned order is ultra vires the IBC, 2016 and has been enacted sans jurisdiction by the NCLT. The order was struck down by the Court on multiple grounds. In its foreword to the judgment, the Court however clarified that nothing prevents the Parliament to legislate the same change that was sought to be brought in by the NCLT by its order dated May 12, 2020.

• Rule by a delegated body cannot be beyond the scope of enabling law or inconsistent with the law

The Court stated 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 Companies Act, 2013 or the IBC, 2016, inclusive of any rules/ regulations made under the IBC, 2016 by the regulatory body, Insolvency and Bankruptcy Board of India."

The Court stated that the Order seeks to limit the intent of the legislature behind Section 7(3) of the IBC which specifies a category of documents to be filed in a Section 7 application instead of one as mandated by the order. Section 7(3) states that the financial creditor shall furnish along with the application record of the default recorded with the information utility or such other record or evidence of default as may be specified.

The Court noted that

"on a plain reading of the above provision, it is immanent that three different categories of documents are available to a financial creditor to prove proof of default by a corporate debtor."

A perusal of Section 4 of the Adjudicating Authority Rules, 2016 (formed under IBC, 2016) as well as Regulation 8 of the CIRP Regulations, 2016 of the IBBI along with the Supreme Court ruling in Swiss Ribbons also revealed to the Court that apart from the financial information of the IU, eight other classes of documents can be considered to be sources that evidence a "financial debt".

Moreover, the Court rejected the contention of NCLT that Section 215 of IBC, 2016 makes it mandatory on operational creditors to file all information including information with regard to assets in relation to which any security interest has been created.

Justice Shekhar B. Saraf thus stated

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.

• NCLT's exercise of its inherent power to pass the impugned order was beyond jurisdiction

The Court ruled that Rule 11 of the NCLT Rules, 2016 which prescribes its inherent power to make such orders as may be necessary for meeting the ends of justice or to prevent the abuse of the process of the Tribunal cannot be above its source or parent act i.e. Companies Act, 2013 and cannot obstruct the operation of a statutory provision of the parent Act under which these Rules were formulated.

It stated that the impugned order adversely affects the substantive rights of the petitioners as a financial creditor, envisaged under IBC, 2016 and also goes beyond the statutory limitations of the Companies Act, 2013 and the principles of natural justice and is thus in excess of jurisdiction of the NCLT. The Court stated

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.

• NCLT cannot make a delegated legislation retrospective under the IBC, 2016

The Court relied on the Supreme Court's ruling in Kanak Exports to rule that

"no delegatee, let alone the NCLT, not even the IBBI can make regulations, by way of the impugned order or of such nature, can 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."

The Court thus struck down the impugned order as ultra vires the IBC, 2016 and the Regulations thereunder noting that if the impugned order is allowed to persist it shall not only restrict the modes of evidence to showcase or adduce an existence of debt accrued to a financial creditor under the IBC, 2016, before the Adjudicating Authority or NCLT, it would also directly be in confrontation with the Sec. 7(3)(a) read with Regulation 8 of the CIRP, 2016, be inconsistent with the IBC, 2016 and thereby defeat the very purpose for which the IBC, 2016 had been enacted.

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