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2020 (8) TMI 462 - HC - Insolvency and BankruptcyCIRP process - Condition precedent for filing new application - submission of certain financial information as a record of default before the Information Utility - Section 7 of the IBC, 2016 - pre-existing dispute or not. 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? - HELD 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. Clause (a) of sub-section 3 of Section 7 clearly 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. As is evident, the clause is disjunctive in nature and when the word or is used in drafting of positive conditions, the positive conditions separated by or are read in the alternative. On a close due diligence of the various provisions above, including section 7 of the IBC, 2016 read with Rule 4 of the AA Rules, 2016 and Form-1 therein, and regulation 8 of the CIRP Regulations, 2016, observations of the Supreme Court in paragraph 32 (provided above), it becomes crystal clear that apart from the financial information of the IU, eight classes of documents can be considered to be sources that evidence a financial debt . Interpretation of section 215 of the IBC, 2016 - HELD THAT - On a bare perusal of the section it appears that subsection (b) having used the word shall makes it mandatory for an operational creditor to file all information including information with regard to assets in relation to which any security interest has been created. This is because in subsection (c) of the above section the words may has been used in contradistinction for operational creditors. One would have to however note that subsection (1) of the above section refers to any person who intends to submit financial information . The use of the said term by the Legislature in subsection (1) leads me to an inference that submitting data to the information utility is not mandatory for all classes of people - Furthermore, one may read the heading of section 215 that reads as follows Procedure for submission, etc., of financial information. It is trite law that the Heading of a section does not necessarily limit the section. However, all factors being taken in consonance and on a harmonious reading of section 215 of the IBC, 2016 with section 7 of the IBC, 2016 alongwith the Rules and Regulation discussed above, I come to the conclusion that the legislature did not intend to make it mandatory for financial creditors to submit financial information to the IU. The 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. Analysis on Inherent powers of the NCLT - HELD THAT - This brings me to the scope of the power of the tribunals under the CA, 2013 to invoke their inherent powers. The Central Government by virtue of its rulemaking powers under Section 469 of the CA, 2013 formulated both the NCLT Rules, 2016 as well as NCLAT Rules, 2016 which have been in operation with effect from July 21, 2016. Both Rules have a similar Rule 11 which revolves around the inherent powers of these Tribunals - Since the impugned order is silent as to the enabling provision, for the sake of hypothesis and the convenience of assumption, let me assume that that the impugned order was issued by the NCLT by exercising its inherent powers under Rule 11 of the NCLT Rules, 2016. The inherent powers of the NCLT under Rule 11 of the NCLT Rules, 2016 do not permit the NCLT to pass the impugned order. Analysis on Substantive and Procedural laws - HELD THAT - 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 - 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. The question answered in affirmitive. 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? - HELD THAT - 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 - 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 - the question is answered in the negative. IU is only one of the designated methods of furnishing proof to the AA or NCLT, to prove the existence of a financial debt that has accrued to a financial creditor. Coupled with Regulation 8 of CIRP Regulations, 2016 it becomes very apparent that the debt that is due to a financial creditor may be proved before the NCLT by any of the four classes of documents stated in subregulation 2(b) of Regulation 8 of the CIRP, 2016. The impugned order dated May 12, 2020 issued by the Principal Bench of the NCLT, New Delhi is held to be ultra vires the IBC, 2016 and the Regulations thereunder, and is accordingly struck down.
Issues Involved:
1. Scope of the powers of the NCLT. 2. Retrospective application of the NCLT's order. Issue-wise Detailed Analysis: I. Scope of the Powers of the NCLT: The petitioners challenged the NCLT's impugned order dated May 12, 2020, which mandated financial creditors to submit financial information from an Information Utility (IU) as a precondition for filing new applications under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC, 2016). The petitioners argued that this order adversely affected their substantive rights under IBC, 2016 and was issued without statutory backing from the Companies Act, 2013 (CA, 2013), IBC, 2016, or regulations by the Insolvency and Bankruptcy Board of India (IBBI). The court examined the powers of the NCLT and NCLAT under Section 424 of the CA, 2013, which allows these tribunals to regulate their procedures but within the confines of natural justice and statutory provisions. It was noted that the hierarchy of legal norms places the Constitution of India at the top, followed by statutory laws, delegated legislation, and executive orders. The impugned order did not conform to the statutory provisions of CA, 2013, or IBC, 2016, and thus failed the judicial test of validity. The court emphasized that Section 7(3)(a) of the IBC, 2016, which requires financial creditors to furnish a record of default or other evidence of default, is disjunctive, allowing multiple forms of evidence. The impugned order limited this to only one form, which was against the legislative intent. The court also highlighted that the AA Rules, 2016, and CIRP Regulations, 2016, specify various documents that can serve as evidence of default, further supporting the petitioners' argument. The court concluded that the NCLT acted beyond its jurisdiction by issuing the impugned order, which was inconsistent with the statutory provisions and regulations. Therefore, the order was struck down as ultra vires the IBC, 2016. II. Retrospective Application of the NCLT's Order: The petitioners argued that the retrospective application of the impugned order adversely affected their rights as financial creditors. The court referred to the Supreme Court's ruling in Director General of Foreign Trade, which stated that delegated legislation could only be prospective unless explicitly empowered to be retrospective. The court noted that neither the CA, 2013, nor the IBC, 2016, provided the NCLT with the authority to issue retrospective orders. The impugned order created new disabilities for financial creditors, which was not permissible under the law. The court also cited precedents that procedural amendments should not be applied retrospectively if they create new obligations or disabilities. The court held that the retrospective nature of the impugned order was invalid and could not stand. Consequently, the order was declared ultra vires and struck down. Conclusion: The court summarized its conclusions, stating that the NCLT exceeded its jurisdiction by issuing the impugned order, which was inconsistent with Section 7(3)(a) of the IBC, 2016, and relevant rules and regulations. Financial creditors could rely on various forms of evidence to prove default, and Section 215 of the IBC, 2016, was not mandatory. The NCLT could not exercise its inherent powers to issue the order, and any delegated legislation could not have a retrospective effect. The impugned order was declared ultra vires and struck down, with no order as to costs.
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