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NCLT: Mandating filing default record under Section 7 IBC: Ultra vires and untenable

NCLT: Mandating filing default record under Section 7 IBC: Ultra vires and untenable

As per the reports, the NCLT on 12th May, 2020 by way of an ‘order’ directed that any new insolvency application filed by a financial creditor under Section 7 of the IBC, 2016 must be accompanied by a default record from an Information Utility. Not only did it make such filing mandatory for new applications, but it also directed that authorized representatives of financial creditors must file such default records in all pending insolvency applications. Section 7 (3) (a) of the Code requires that a financial creditor shall furnish either a default record or an information utility, or any other record or evidence to prove default by a corporate debtor.

The use of ‘shall’ in the provision cannot be construed as mandatory as far as furnishing default record from an information utility is concerned because no prejudice would be caused to any person or adjudicating authority (NCLT) if the default is proved by alternate means. Provisions regarding time-lines for the adjudication of insolvency applications under IBC are directory in nature and not mandatory. It has been held that, while dealing with various provisions of IBC, the absence of any consequences for infraction of a procedural provision implies that such provision must be interpreted as directory and not mandatory.

Therefore, it is clear that as no adverse consequence would occur if a financial creditor opts to furnish any evidence of default other than default record from an information utility, the procedural provision under Section 7(3)(a) of IBC can only be construed as directory and not mandatory. Therefore, the NCLT cannot make furnishing default record as such a direction is ultra vires of the framework of Section 7 of IBC.

 

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