Information Utilities Under IBC: Navigating Judicial And Regulatory Complexities

Even though IBC tends to consider IUs as one of the pillars of the whole process, there tends to be a disparity with the same wherein the idea of mandatory submission of financial information to IU tends to loom in despair. NCLT Kolkata recently in the case of State Bank of India vs Anupriya ManagementPvt Ltd^[1] while dealing with the CIRP process dealt with the same issue regarding acceptance and receipt of information. It took note of the Rule 20(1A) of IBBI Regulations 2017 which states that before filing an application to initiate the corporate insolvency resolution process under Section 7 or Section 9 of the Insolvency and Bankruptcy Code, 2016, the creditor must file the information regarding the default with the Information Utility. The Information Utility will then process this information to issue a record of default. But the court stated that it is not mandatory to follow the same and that the guidelines of submitting information under section 7 is sufficient for the initiation of CIRP process.

The same was again highlighted by the High Court of Kolkata in the case of Univalue Projects Pvt. Ltd v. Union of India & Ors^[2] upholding section 7 of IBC and stating that the three categories of evidence that can be provided being a record of the default recorded with the information utility, such other record and evidence of default as may be specified. This disjunctive use of the above makes it clear that either of the three may be provided by the financial creditor to the adjudicating authority. The High Court in the end also stated 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.

Upholding the same judgement, NCLT Hyderabad in its order of Mr. Ahmed Alam Khan vs M/s Golconda Textiles Private Limited^[3] also stated that the financial creditor having failed to file the 'Record of Default' from Information Utility while also analysing the terms of the circular by the principal bench dated 12-05-2020 in the end stated the present application is liable to be rejected and considered it to be unsustainable and also found section 7 to be sufficient for a financial creditor to show an existence of default.

The validity of IU was further examined in the case of Mr. Sarish Kumar Chaudhry Vs. Elegant It Solutions Pvt Ltd^[4]. wherein NCLT Delhi stated that the mere filing of financial information in Form-C with the Information Utility does not constitute a record of default and therefore the court was satisfied that there is no debt and no default on the part of the Corporate Debtor.

The Contradicting Statues

Regulation 20 of the IBBI (Information Utilities) Regulations, 2017 as amended on 14.06.2022, introduces Regulation 20(1A). This requires a Financial Creditor, before filing an application to initiate the corporate insolvency resolution process under Section 7 or 9, to file information of default with the Information Utility. The Information Utility then processes this information to issue a record of default as per Regulation 21.

The main issue is that after adding Regulation 20(1A), applications under Sections 7 and 9 must now include a record of default issued by an Information Utility. Although Regulation 20 was amended on 14.06.2022, there were no changes to Section 7 of the IBC, which allows a Financial Creditor to file a record of default from the Information Utility or other specified records, nor to the 2016 Rules or CIRP Regulations. Thus, the statutory scheme allows a Financial Creditor to provide a record of default either from the Information Utility or through other specified records or evidence of default. Even the NCLT Delhi gave out an order for mandatory submission of information to the information utility which was later striked down by the Kolkata High Court in its judgement of Univalue Projects Pvt. Ltd v. Union of India & Ors.

Even the appellate tribunal in its judgement of Vijay Kumar Singhania v. Bank of Baroda ^[5]stated that Regulation 20(1A) does not mean that an application filed under Section 7 must be rejected if it lacks information of default from an Information Utility after the amendment effective from 14.06.2022. If the Financial Creditor provides other evidence to prove the default, the application should still be considered. Therefore, even after the amendment of Regulation 20 with the addition of Regulation 20(1A), the Financial Creditor can file evidence of default as outlined in Regulation 2A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, along with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.

While analysing all the cases it has become clearly visible that IUs even though are the pillars of the IBC, there tends to be a view among the NCLT's and the companies to not consider it as a compulsory stage. Often, Information Utilities (IUs) face significant entry barriers. This is a key reason why there is only one IU in India (National e-Governance Services Ltd. (NeSL)). Regulation 3 of the IU Regulations requires IUs to have a net worth of at least Rs. 50 crores and prevents foreign control of IUs. Additionally, Regulation 6(2)(e) mandates that an IU must pay an annual fee of fifty lakh rupees to the Board. For a financially struggling nation, these stringent criteria seem unreasonable and may lead to a monopoly. Moreover, since an IU holds sensitive information, it must use advanced technology, which adds more pressure on NeSL to manage everything on a large scale alone. Consequently, companies are reluctant to use IUs ^[6].

Even RBI has taken initiatives to promote the usage of IUs. On 19.12.2017, the RBI advised all financial creditors it regulates to comply with the relevant provisions of the IBC, 2016, and the IBBI (IUs) Regulations, 2017, and to implement appropriate systems and procedures for compliance. Despite the IU Regulations and NeSL being in place for over many years, this crucial component of the Code has yet to achieve maximum time efficiency in the Insolvency Resolution Process.^[7]

In conclusion, Information Utilities (IUs) under the Insolvency and Bankruptcy Code (IBC), 2016, are designed to be crucial for the success of insolvency proceedings by providing comprehensive, accurate, and up-to-date financial information about debtors. However, despite the IBC's intent to make IUs a cornerstone of the insolvency process, there are significant challenges and inconsistencies in their implementation and usage. The judicial interpretations by various courts, including the NCLT and High Courts, highlight a lack of consensus on the mandatory nature of submitting information to IUs. The amendments to Regulation 20 have further complicated the landscape, leading to differing views on the necessity of records of default from IUs for initiating insolvency proceedings. Despite these hurdles, initiatives by regulatory bodies like the RBI, which has urged financial creditors to comply with IU regulations, indicate a push towards greater integration of IUs in the insolvency framework. The judiciary, particularly the NCLT, has played a pivotal role in promoting the use of IUs by interpreting the regulations and providing clarity on their application. In my opinion, the NCLT deserves commendation for its efforts to promote the use of Information Utilities and bring clarity to their role within the IBC framework. By addressing ambiguities and interpreting regulations in a manner that aims to balance statutory requirements with practical considerations, the NCLT is fostering a more robust and efficient insolvency resolution process.

References

Articles and Government Sources

1. https://hnluccls.in/2020/11/07/afflictions-in-the-mandatory-filing-of-records-with-the-information-utility-under-ibc/
2. https://rbidocs.rbi.org.in/rdocs/notification/PDFs/IUC19122017063A65D368CD4F6DAEC111841091C932.PDF

[1] State Bank of India vs Anupriya Management Pvt Ltd 2023 SCC OnLine NCLT 16476