TaxTMI 
TaxTMI 
2020 (8) TMI 462
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.... 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. 3. It is the grouse of the first writ petitioner that by virtue of being a financial creditor who has such a pre-existing application filed under Section 7 of the IBC, 2016 pending before the NCLT at its Kolkata Bench, the impugned order has the effect of adversely altering their subst....
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....t and the National Company Law Appellate Tribunal, in support of arguments that the NCLT does not possess the statutory or regulatory backing to issue the impugned order, let alone enforce it retrospectively: i. Pradyut Kumar Bose -v- The Hon'ble the Chief Justice of Calcutta High Court, AIR 1965 SC 285, ii. Hitendra Vishnu Thakur -v- the State of Maharashtra, (1994) 4 SCC 602, iii. Pallawi Resources Limited -v- Protos Engineering Company Pvt. Ltd., (2010) 5 SCC 196, iv. Satheedevi -v- Prasanna, (2010) 5 SCC 622 v. Neelkanth Township & Construction Pvt. Ltd. -v- Urban Infrastructure Trustees Ltd., Company Appeal (AT) (Insolvency) No. 44 of 2017 dated August 11, 2017. vi. Bharti Defence and Infrastructure Ltd. -v- Edelweiss Asset Reconstruction Company Ltd., Company Appeal (AT) (Insolvency) No. 71 of 2017 dated October 17, 2017. 7. Ms. Chatterjee, in her submissions, has cast aspersions on the competency of the NCLT to issue the impugned order. She has referred to Section 424 of the CA, 2013 to contend that though the functioning of the NCLT and NCLAT is not bound by the rigours of the Code of Civil Procedure (hereinafter refe....
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....eafter dealt with the substantive provision which forms the core of this impugned order: Section 7 of the IBC, 2016. She had relied upon clause (a) to sub-section (3) of Section 7 of the IBC, 2016 to stress on the fact that a record of default recorded with the IU is one of the designated methods of furnishing proof to the Adjudicating Authority (hereinafter referred to as, "AA") or in other words, the NCLT, to prove the existence of a financial debt that has accrued to a financial creditor. The learned counsel for the petitioners based, on such interpretation of Section 7(3)(a) of the IBC, 2016 contends that the continuous usage of the word 'or' makes it clear that the intention of the legislature was to make this section 'disjunctive' and thereby indicate that such 'record of default recorded with the IU' was one of the forms of evidence to be produced and not the only form of evidence that would be considered by the AA / NCLT. To lend credence to this argument, the counsel for the petitioner has placed reliance on Satheedevi (supra) to state that it is trite law that the intention of the legislature must be found in the words used by the legislature itself in their plain grammat....
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....oners, who do not have such a security interest, who then have to mandatorily (the sub-section employs the phrase 'shall') submit the requisite financial information under Form C of the IU Regulations, 2017. 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. 15. She has also urged that they are not financial creditors who possess a 'security interest', as defined under sub-section (zf) to Section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as, "SARFESI, 2002") but the first writ petitioners had merely extended an "Inter Corporate Deposit" (hereinafter referred to as, "ICD") to the corporate debtor under Section 186 of the CA, 2013 which does not entail the creation of such a security interest. 16. Hence, according to Ms.....
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....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 (supra) 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. 21. She had also relied on Addl. District Magistrate (Rev.) Delhi Admin. v. Siri Ram (supra) and Kunj B. L. Butail (supra) to establish the contours and specifics of the process of delegated law-making, within the four corners of the law. 22. Mrs. ....
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....o contend that a delegated/subordinate legislation can only be prospective and not retrospective, unless the designated rule-making authority has been vested with such powers to make rules with retrospective effect. 26. Per contra, the learned counsel for the Respondent, Mr. Kundalia, had argued that based on Section 424 of the CA, 2013, both the NCLT and NCLAT were vested with powers to regulate their own procedures. It is his submission that the impugned order dated May 12, 2020 was nothing but the implementation of the mandatory and necessary requirement and compliance of various provisions of the IBC, 2016. Therefore, the NCLT was well within its rights to issue the impugned order dated May 12, 2020 while being in compliance with the provisions of the IBC, 2016. 27. As far as the interpretation of Section 215 of the IBC, 2016 by Ms. Chatterjee is concerned, Mr. Kundalia has urged that she has misconstrued the interpretation of Section 215(2) of the IBC, 2016, which as per Mr. Kundalia, does not make any distinction between a secured creditor or an unsecured creditor. Such classification by the petitioners, has been dubbed as 'illusory' and 'against settled principles of i....
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....ries of law that are well known, that is, substantive and procedural law wherein evidence is a part of the procedural law. Taking this argument forward he submits that evidence being part of procedural law falls within the powers of the tribunal to regulate its own procedure within the ambit of Section 424 of CA, 2013. 31. Mr. Kundalia, has also chosen to rely on the following judgments, to buttress his arguments pertaining to retrospective application of the impugned order: i. Shyam Sunder -v- Ram Kumar & Anr., (2001) 8 SCC 24, ii. Gurbachan Singh -v- Satpal Singh, (1990) 1 SCC 445, iii. K. Kapen Chako -v- Provident Investment Co. Ltd., (1977) 1 SCC 593, iv. New India Assurance Co. Ltd. -v- Smt. Shanti Misra, Adult., (1975) 2 SCC 840. 32. Mr. Kundalia had also drawn my attention to Regulation 1(3) of the CIRP Regulations, 2016 which allows a fast-track process under Chapter IV of Part-2 of the IBC, 2016. He had argued that the petitioners, represented by Ms. Bhuteria, had not made out a case that their case falls within and/or qualifies to be processed under Section 55(2) of the IBC, 2016. 33. Mrs. Bhuteria, in her supplementary note of....
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....ceed purely administratively or base their conclusions on subjective tests or inclinations." Emphasis supplied This view was reiterated in an encapsulated form yet again by the Supreme Court in State Bank of India -v- Jah Developers Pvt. Ltd., (2019) 6 SCC 787 wherein the Court held: "12..[W]hile this may be correct, it is clear that before a body can be said to be a "tribunal", it must be invested with the judicial power of the State to decide a lis which arises before it. This would necessarily mean that all "tribunals" must be legally authorised to take evidence by statute or subordinate legislation or otherwise, the judicial power of the State vesting in such Tribunal. Emphasis supplied 37. When it comes to the exercise of powers by Tribunals like the NCLT or NCLAT while being subjected to certain statutory limitations, the Supreme Court in Grindlays Bank Ltd., 1980 (Supp) SCC 420 had held: "6...[B]ut it is a well known rule of statutory construction that a Tribunal or body should be considered to be endowed with such ancillary or incidental powers as are necessary to discharge its functions effectively for the purpose of doing justice ....
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....and NCLAT is limited both by principles of natural justice as well as statutory provisions and regulations framed under such legislations. 39. Based on the jurist Kelsen's 'Pure Theory of Law', the Supreme Court in the case of Government of Andhra Pradesh -v- P. Laxmi Devi (Smt), (2008) 4 SCC 720 had recorded the hierarchy of legal norms in India, in the following manner: "34. In India the grundnorm is the Indian Constitution, and the hierarchy is as follows: i.The Constitution of India; ii.Statutory law, which may be either law made by Parliament or by the State Legislature; iii.Delegated Legislation, which may be in the form of rules made under the statute, regulations made under the statute, etc.; iv.Purely executive orders not made under any statute. 35. If a law (norm) in a higher layer in the above hierarchy clashes with a law in a lower layer, the former will prevail..." Emphasis supplied 40. Accordingly, based on the above hierarchy, I am in agreement with Ms. Chatterjee as far as the hierarchy of legal norms involved in this case is concerned and I adumbrate it as follows: i. Provisions of the CA....
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....er. Mr. Kundalia had argued that based on Section 424 of the CA, 2013, both the NCLT and NCLAT were vested with powers to regulate their own procedures. It was his submission that the impugned order dated May 12, 2020 was nothing but the implementation of the mandatory and necessary requirement and compliance of various provisions of the IBC, 2016. Per contra, the petitioners have vehemently submitted that the impugned exercise of power fell foul to the provisions of the CA, 2013, the IBC, 2016 and the rules made under the IBC. Analysis on "Statutes, Rules and Regulations" 44. Moving on, since both the parties have been jostling with the interpretative scope of "legislative intent" of Section 7(3)(a) as it forms the core of their arguments, I am reminded of the wise caveat that was appended by the House of Lords in the landmark case of Salomon -v- Salomon & Co., [1897] A.C. 22 at page 38: ".."Intention of the Legislature" is a common but very slippery phrase, which, popularly understood, may signify anything from intention embodied in positive enactment to speculative opinion as to what the Legislature probably would have meant, although there has been an omission to....
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....ear that either of the three may be provided by the financial creditor to the adjudicating authority. As per Mr. Kundalia's arguments, the term "as may be specified" is applicable to all the three categories and not just to the evidence in default. In my view, if the intention of the legislature was to make the term applicable to all three categories a comma would have been inserted after the word "default". Following the principles of litera legis, I am of the view that the legislature had no intention to extend the term "as may be specified" to all the three categories. Furthermore, on a plain reading, I do not find this to be a case of casus omissus,[ See more: Unique Butyle Tube Industries (P) Ltd -v- U.P. Financial Corporation, (2003) 2 SCC 455 at paragraph 13, Union of India -v- Deoki Nandan Aggarwal, 1992 Supp (1) SCC 323 at paragraph 14, P.K. Unni -v- Nirmala Industries & Others., (1990) 2 SCC 378 at paragraph 15. Note: The approach for a judicial intervention in supplementing an omission in a statute is a fiercely debated point of law. Denning, L.J. had opined that when such a defect appears, a judge cannot merely fold his hands and blame the draftsman but recourse should ....
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.... Rules, 2016 that have been framed by the Central Government based on the powers conferred by Section 239 of the IBC, 2016 read with Sections 7, 8, 9 and 10 of the self-same Code whereby these Rules have been in force since December 1, 2016. 49. Rule 4 of the AA Rules, 2016 provides the modus operandi when it comes to a financial creditor making an application for the initiation of a corporate insolvency resolution process. The sub-Rule (1) of Rule 4 is extracted below: "4. Application by financial creditor.- (1) A financial creditor, either by itself or jointly, shall make an application for initiating the corporate insolvency resolution process against a corporate debtor under section 7 of the Code in Form 1, accompanied with documents and records required therein and as specified in the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. Emphasis supplied Mrs. Bhuteria had already drawn my minute attention to this Form-1 at 'PART-V' of the AA Rules, 2016, where at serial no. 3, the entry reads: "Record of default with the information utility, if any (Attach a copy of such record)" while the ent....
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....ted paragraphs of Innoventive Industries (supra) while authoring his judgment in Swiss Ribbons (P) Ltd. (supra). In addition to this, he also considered the pertinence of the IU in paragraph 31 before quoting the other sources of evidence which evidence a financial debt, in the following words: "32. Apart from the record maintained by such utility, Form I appended to the Insolvency and Bankruptcy (Adjudicating Authority) Rules, 2016, makes it clear that the following are other sources which evidence a financial debt: a) Particulars of security held, if any, the date of its creation, its estimated value as per the creditor; b) Certificate of registration of charge issued by the registrar of companies (if the corporate debtor is a company); c) Order of a court, tribunal or arbitral panel adjudicating on the default; d) Record of default with the information utility; e) Details of succession certificate, or probate of a will, or letter of administration, or court decree (as may be applicable), under the Indian Succession Act, 1925; f) The latest and complete copy of the financial contract reflecting all amendments and waiv....
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....on (1) leads me to an inference that submitting data to the information utility is not mandatory for all classes of people. 53. 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. This view of mine is fortified by the fact that the Supreme Court had also considered the pertinence of the IU based on the IU Regulations, 2017 and specifically stated that other sources of evidence are present apart from the record maintained by the IU. It may therefore be inferred that Section 215 of the IBC, 2016 is not mandatory in nature. 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 fina....
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....her in view of Rule 8 of Insolvency and Bankruptcy (Application to Adjudicating Rules), 2016, the NCLAT could take recourse to its inherent powers under Rule 11 to allow a compromise before it by the parties after admission of the matter. The NCLAT had held in view of Rule 8 of the 2016 Rules (which was a delegated legislation made by the Central Government under Sec. 239 of the IBC, 2016), it could not take recourse under Rule 11 of the NCLAT Rules, 2016 to allow a compromise after an application had been admitted. The Supreme Court stated, prima facie, this appeared to be the 'correct position of law'; thereby exhibiting the hierarchy of the legal norms applicable as I have described in the foregoing paragraphs. Ergo, 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' 59. Mr. Kundalia had strongly relied on the dictum of the Constitution Bench of Supreme Court in Izhar Ahmad Khan (supra), specifically paragraph 18 to emphasize on the existence of two categories of laws, that is, substantive and procedural wherein the law of evidence is a part of the procedural....
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.... 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. Analysis on "Retrospective power in a delegated legislation" 61. Now, apropos of the retrospective nature of this impugned order is concerned, I have already ruled that the NCLT possessed no enabling powers to pass such an order in the first place. Yet, when it comes to the retrospective nature of such delegated legislations, the Supreme Court had in the case of Director General of Foreign Trade (supra), categorically held as such: "113. We may, in the first instance, make this legal position clear that a delegated or subordinate legislation can only be prospective and not retrospective, unless the rule-making authority has been vested with power under a statute to make rules with retrospective effect." Emphasis supplied 62. Mr. Kundalia had relied on four judgm....
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.... 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 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. 66. The impugned order, if allowed to persist in terms of its current legality, would 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 AA or NCLT, it would 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. And therefore, this impugned order dated May 12, 2020, warrants an interference under the writ jurisdiction of this Court. In conclusion thereof, this writ petition succeeds. The impugned order dated May 12, 2020 issued by the Principal Bench of the NCLT, New Delhi is held to be ultra ....
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....w my appreciation to the counsel appearing on behalf of the petitioners for the consummate and diligent efforts during arguments coupled with the dexterity in submitting precise notes of arguments. 69. There shall be no order as to costs. Both the writ petitions are finally disposed of. 70. Urgent photostat certified copy of this order, if applied for, should be made available to the parties upon compliance with the requisite formalities. AN AFTERWORD 71. While India's experiment with political autonomy began post-midnight on August 15, 1947, when it comes to the question of economic reforms, notable Indian economists opine that the decades of the 1980s and 1990s ushered in a more robust set of reforms to enhance the nation's economic growth. As prominent Indian economist Arvind Panagariya had noted: [ Arvind Panagariya, India in the 1980s and 1990s: A Triumph of Reforms, IMF Working Paper WP/04/43, last accessed from: https://www.imf.org/external/pubs/ft/wp/2004/wp0443.pdf ] "..[G]rowth during the 1980s was fragile, highly variable from year to year, and unsustainable. In contrast, once the 1991 reforms took root, growth became less variable and more sustainab....
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....f such sick entities to resort to the SICA provisions simply to evade tentative legal obligations. Yet, this Act of 2003 also came up woefully short to foster a change in practice apropos of the credit recovery landscape and was ultimately replaced by the comprehensive IBC, 2016 which has been in effect from December 1, 2016. The IBC, 2016, has remarkably brought in a paradigm shift when it comes to tackling the complications of the credit recovery landscape and no one captures the soul of the IBC, 2016 better than Rohinton Nariman, J. in the epilogue to Swiss Ribbons (P) Ltd. (supra), while ruling on the constitutionality of the Code, in the following words: "120. The Insolvency Code is a legislation which deals with economic matters and, in the larger sense, deals with the economy of the country as a whole. Earlier experiments, as we have seen, in terms of legislations having failed, "trial" having led to repeated "errors", ultimately led to the enactment of the Code. The experiment contained in the Code, judged by the generality of its provisions and not by so-called crudities and inequities that have been pointed out by the petitioners, passes constitutional muster. To....