Default Record Under the Insolvency and Bankruptcy Code: Recent Changes

*Aparna R

The Insolvency and Bankruptcy Code, 2016 (“Code”) mandates the Financial creditor (“FC”) to submit the default record under Section 7 of the Code for the purpose of admitting the application before the Adjudicating Authority for the Corporate Insolvency Resolution Process(“CIRP”). The Code defines default as a non-payment of debt where the whole or any part or instalment of the amount of debt has become due and payable and has yet not been repaid. The default on the part of the Corporate Debtor is proved by the default record. Even in the cases of initiating a fast-track CIRP the role of default record is significant in substantiating the claims and proving the default. The default record can be obtained from the Information Utility (“IU”) system which serves as an electronic repository in storing the information regarding the borrowings of the Corporate debtor. The IU procures, maintains and provides financial information to the businesses, financial institutions, tribunals.

Until recently, the filing of default record from the IU as not mandatory. By an Order dated 12th May 2020, the National Company Law Tribunal (“NCLT”) mandated the filing of default record from the IU for any new applications filed before the Adjudicating Authority. Further, the NCLT went ahead and even mandated the default record from the IU for any pending application i.e. a retrospective application was given to the circular.

The present Order was challenged in the Calcutta High Court in the case of Univalue Projects Pvt Ltd v. UOI[i]  on the grounds that the circular issued by the NCLT was outside the scope of the parent act i.e. the Companies Act, 2013 and the Code that has established the NCLT. Furthermore, the Order seeks to contravene the prevailing regulations of the Insolvency and Bankruptcy Board of India (“IBBI”). The significant aspect to be noted is that the Order seeks to limit the scope of the claim that is filed by the FC under section 7 of the Code. Although the NCLT functions in an independent manner, the authority to make rules and regulations that contravenes the parent act itself, however, calls for a serious consideration. Submission of the default record from the IU is in fact one of the methods of proving the existence of the claim and it is not the only method i.e. it can be either retrieved IU or by other such record or evidence of default as may be specified by the board. In fact, the Form C (proof of claim) submitted by the financial creditor does not particularly require the FC to submit the default record from the IU.

On a careful reading of section 7 of the Code, it is evident that the word “or” has been used to elaborate on what can be submitted as evidence or providing the default/claim. The word “or” is disjunctive and cannot be interpreted to be conjunctive. It is a settled position that while making rules under an Act, the rules or regulation shall be in conformity with the parent Act and its objects[ii]. The Calcutta High Court held that though the powers to make its own procedures and rules are derived from section 424 of the Companies Act, 2013, such power should confer with the provisions of the parent act itself and follow the principle of Natural justice. The phrase “as may be specified” in section 7 of the Code shall carry its meaning from Section 3(32) of the Code. Therefore, the phrase “other such record or evidence of default” shall include the records that are specified by the IBBI.

Owing to the Judgement of the Calcutta High Court holding the concerned Order to be beyond the scope of NCLT, a new circular was as issued on 13th August 2020 clarifying that it is not mandatory to file default record from the IU. The 13th August 2020 circular stood as under:

“All concerned are directed to file default record from the IU along with the new petitions being filed u/s 7 of the code wherever available with the IU. The authorised representative/parties in the cases pending for admission under the code are also directed to file default record from the IU wherever available with the IU”

But very recently, the Order issued on 13th August 2020 was also withdrawn by the NCLT on 7th September 2020. Therefore, the current position is that the default record shall be submitted by the FC in any one of the one of manner specified in section 7 of the code i.e. either from the IU or other such evidence or record as may be specified. These various circulars issued by the NCLT has only caused the confusions in the minds of the FC and created procedural difficulties in proving their claim before the Adjudicating Authority. One of the significant objects of the Code is the timely revival of the Corporate Debtor. This purpose is being defeated by disputing the circulars issued by the NCLT that is way beyond its jurisdictions. The NCLT being the Quasi- Judicial body must act in conformity to its rules and regulations laid down by the parent Act in order to eliminate any undue delay in the Insolvency proceedings against the Corporate Debtor. Further, the NCLT while making rules and regulations must give paramount consideration to the creditors who are affected the most if there are constant changes to the rules made in this regard.

*The author is a fourth-year student pursuing B.B.A., LL.B. at Symbiosis Law School, Hyderabad.

[i] Univalue Project Pvt Ltd v. UOI (W. P. No. 5595 of 2020).

[ii] General Officer Commanding-in-Chief v. Subhash Chandra Yadav, AIR 1988 SC 876.