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TMI Blog2020 (8) TMI 462X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 substantive rights as granted to a creditor under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 referred to as "CPC, 1908"), the same are guided by the rules of natural justice and subject to the provisions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. 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 grammatical meaning. 11. Ms. Chatterjee has further quoted Regulation 8 of the IBBI (Insolvency Resolution Process for C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ') 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. Chatterjee, Section 7(3)(a) of IBC, 2016 read with Regulation 8 of CIRP, 2016 coupled with Section 215(2) of IBC, 2016 with R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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. Bhuteria introduced a fresh point not touched upon by Ms. Chatterjee. She submitted that the NCLT was also not empowered by the inherent powers under Rule 11 of the NCLT Rules, 2016 to promulgate the impugned o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 interpretation'. According to him, Section 215(2) of the IBC, 2016 postulates that in both situations i.e. submission of financial information and information relating to assets in relation to which any security interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers 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 written arguments, has strongly rebuffed this line of argumentation, drawing the attention of the Court to Regulation 2(1)(a) of the CIRP Regulations, 2016 which clearly defines an applicant filing an application, under Section 7 of the IBC, 2016. She has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ]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 between the parties. In a case of this nature, we are of the view that the Tribunal should be considered as invested with such incidental or ancillary powers unless there is any indication in the statute to the contrary." Emphasis supplied Therefore, based on the above view of the Supreme Court, even the exercise of inci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing 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, 2013 and IBC, 2016 as they are Acts passed by the Parliament; ii. Rules enacted by the Central Government and Regulations enacted by the IBBI under powers granted by Sec. 239 and Sec. 240 of the IBC, 2016 respectively; iii. NCLT/NCLAT regulating their own procedure subject to Sec. 424 of the CA, 2013 and the NCLT/NCLAT Rules, 2016. 41. Now, coming to the legal propriety of the impugned order that has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions 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 enact it. In a Court of Law or Equity, what the Legislature intended to be done or not to be done can only be legitimately ascertained from that which it has chosen to enact, either in express words or by reasonable and necessary implication.." 45. And therefore going forward with the thrust of the above caveat, I intend to ascertain the true intent of the IBC, 2016 and the scope of Section 7(3)(a) of the IBC, 2016, borne out either by the express words used or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cified" 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 be taken to identify the legislative intent and supplement the words so as to give 'force of life' to the legislature's intention. See more: Seaford Court Estates Ltd. -v- Asher, (1949) 2 All ER 155; these views were once again reiterated in his dissenting judgment in Magor & St. Mellons Rural District Council -v- Newport Corporation, (1950) 2 All ER 1226). But these views drew the ire of the House of Lords, for such an approach, in the guise of interpretation, allowed a judge to venture into the restricted arena of legislating, and hen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther 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 entry at serial no. 8 reads: "List of other documents attached to this application in order to prove the existence of financial debt, the amount and date of default." As per her submission, it clearly showcases, that a record of default with the IU is not mandatory but the law accommodates other kinds of evidences for proving the existence of such a default. These 'documents and records' to prove the existence of a financial debt have been specified by the IBBI in Regulation 8 of the CIRP Regulations, 2016. The relevant Regulation 8 is delineated below: "8. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtificate 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 waivers to date; g) A record of default as available with any credit information company; h) Copies of entries in a bankers book in accordance with the Bankers Books Evidence Act, 1891." Emphasis supplied Therefore, all eight classes of documents enumerated under Part V of Form-1 appended to the AA Rules, 2016 have been held by the Supreme Court to be 'other sources which evidence a financial debt'. 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 bec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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" 55. 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 I am concerned with the order promulgated by the NCLT, I produce Rule 11 of the NCLT Rules, 2016: "11. Inherent Pow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 law. However, as paragraph 15 of the same judgment displays, the Court was seized of a matter wherein the subordinate rules framed by the Central Government under a statute was under challenge. I cannot agree with such a reliance, for it does not aid the Respondent. I add at the cost of reiteration such powers of the tribunal cannot rise above their source, that is a delegated form of legislation, and obstruct the operation of a statutory provision of the parent Act under which these Rules were formulated. 60. Additionally, the Supreme Court, in the case of Kailash v. Nanhku and Others, (2005) 4 SCC 480 had laid down the scope of procedural law, in the following terms: "28. All the rules of procedure are the handmaid of justice. The language em ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 judgments, Shyam Sundar (supra), Gurbhachan Singh (supra), K. Kapen Chako (supra) and New India Assurance Ltd. (supra) to support the retrospectivity of the impugned order. The commonality of these precedents bears the fact that the Supreme Court was seized with the question regarding if amendments made to an 'Act' could be retrospective in nature or not. However, in this case, no amendment has been made to either the CA, 2013 or the IBC, 2016 to reflect such a retrospective operation. The impugned order is by no stretch of imagination an amendment to an Act of Parliament, and therefore the reliance placed on these precedents by Mr. Kundalia does not salvage this limb of his argument. 63. Ms. Chatterjee had relied on Hitendra Vishnu Thakur (supra) to submit that any procedural amendment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 vires the IBC, 2016 and the Regulations thereunder, and is accordingly struck down. 67. Therefore, to summarize my conclusions: a) The NCLT has acted without jurisdiction and exceeded its jurisdiction that is limited within the four corners of Section 424 of the CA, 2013 by passing the impugned order in violation of Section 7(3)(a) of the IBC, 2016. Furthermore, the impugned order is clearly in confrontation with Rule 4 of AA Rules, 2016 and Regulation 8 of the CIRP Regulations, 2016 and thereby defeats the very purpose for which the IBC, 2016 has been enacted. b) 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 showcases t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sustainable with even a slight upward shift in the mean growth rate. At the same time, reforms played a significant role in spurring growth in the 1980s. The difference between the reforms in the 1980s and those in the 1990s is that the former were limited in scope and without a clear road map whereas the latter were systematic and systemic. This said the reforms in the 1980s must be viewed as precursor to those in the 1990s rather than a part of the isolated and sporadic liberalizing actions during the 1960s and 1970s, which were often reversed within a short period. The 1980s reforms proved particularly crucial to building the confidence of politicians regarding the ability of policy changes such as devaluation, trade liberalization, and delicensing of investment to spur growth without disruption." One of the crucial arenas where such a reform was als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lations 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 stay experimentation in things economic is a grave responsibility, and denial of the right to experiment is fraught with serious consequences to the nation. We have also seen that the working of the Code is being monitored by the Central Government by Expert Committees that have been set up in this behalf. Amendments have been made in the short period in which the Code has operated, both to the Code itself as well as to subordinate legislation made under it. This process is an ongoing process which involves all stakeholders, including the petitioners. 121. We are happy to note that in the working of the Code, the flow of financial resource to the commercial sector in India has increased exponentially as a result of financial debts being repaid........These figures show that the experiment conducted in enacting the Code is proving to be largely successful. The defaulter ..... X X X X Extracts X X X X X X X X Extracts X X X X
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