The Insolvency and Bankruptcy Code, 2016 (IBC)
Adjudicatory attempt to step into the shoes of Regulatory
1. The Hon’ble National Company Law Tribunal (NCLT) vide its order[i] dated 12th May 2020 come out with following directions:
a. 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 a record of default under section 7 of IBC, 2016
b. The Authorized Representatives/Parties in the cases pending for admission under the aforesaid section of IBC also directed to file default record from Information utility before next date of hearing.
2. The direction covering all new application/ petition, as well as pending for admission petition under section 7 of IBC, 2016.
B. Relevant Sections:
A. Section 7 of the Act, Initiation of corporate insolvency resolution process by financial creditor,
1. A financial creditor either by itself or jointly with [other financial creditors or any other person on behalf of the financial creditor, as may be notified by the Central Government] may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred.
Explanation. – For the purposes of this sub-section, a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but also to any other financial creditor of the corporate debtor.
2. The financial creditor shall make an application under sub-section (1) in such form and manner and accompanied with such fee as may be prescribed.
3. The financial creditor shall, along with the application furnish –
a. record of the default recorded with the information utility or such other record or evidence of default as may be specified;
b. the name of the resolution professional proposed to act as an interim resolution professional; and
c. Any other information as may be specified by the Board.
4. The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), 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).
5. Where the Adjudicating Authority is satisfied that –
a. a default has occurred and the application under sub-section (2) is complete, and there is no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application; or
b. default has not occurred or the application under sub-section (2) is incomplete or any disciplinary proceeding is pending against the proposed resolution professional, it may, by order, reject such application:
Provided that the Adjudicating Authority shall, before rejecting the application under clause (b) of sub-section (5), give a notice to the applicant to rectify the defect in his application within seven days of receipt of such notice from the Adjudicating Authority.
6. The corporate insolvency resolution process shall commence from the date of admission of the application under sub-section (5).
7. The Adjudicating Authority shall communicate-
a. the order under clause (a) of sub-section (5) to the financial creditor and the corporate debtor;
b. the order under clause (b) of sub-section (5) to the financial creditor, within seven days of admission or rejection of such application, as the case may be.
c. Examination of relevant Sections:
8. Section-7 of the Act does not provide specific and mandatory requirement, to only procure default record from Information Utility by financial creditor.
9. As per section- 7(3)(a), “ record of the default recorded with the information utility or such other record or evidence of default as may be specified”. So one can deduce that it is purely upon the discretion of financial creditors to provide default records subject to satisfaction of NCLT.
10. The NCLT is only the adjudicating authority under the IBC, and not a regulatory authority, which empowers the NCLT to make regulations and guidelines under the code. Section 196(1)(u), which empowers the only IBBI to make regulations and guidelines on matters relating to insolvency and bankruptcy as may be required under the code.
11. NCLT, as an adjudicating authority cannot surpass the nature of law, already provided distinctly under the code.
12. Besides, if the default is proved by alternate means, no prejudice would be caused to any person or adjudicating authority.
13. Even the order dated 12 May 2020 does not provide the enabling provision of law, which authorised NCLT to issue such direction/ order.
14. However, one school of thought may bring in, the inherent power as provided under the Rule 11 of the National Company Law Tribunal Rules, 2016, “Nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Tribunal to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal.
15. Even if we consider this rule, it nowhere provides that NCLT have the power to constrain the scope of the provision of the code.
16. Therefore The Hon’ble National Company Law Tribunal (NCLT) vide its order dated 12th May 2020, “attempted to step into the shoes of Regulatory” vide restricting the scope of section 7(3)(a), also, unwittingly try to give retrospective effect by covering those applications which are already filed and pending for admission. Hope the Hon’ble NCLT shall come out with a clarification, amendment in their order.
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