The law will assist only those who are vigilant about their rights and not those who sleep over them – Article authored by Adv. Pratik Sarkar

The law will assist only those who are vigilant about their rights and not those who sleep over them

-Sagufa Ahmed v. Upper Assam Plywood Products (P) Ltd., (2021) 2 SCC 317

-Article authored by Adv. Pratik Sarkar

It is a common principle that the law favours those who seek to enforce them vigilantly — which is to say, in a timely manner. However, we often come across situations where creditors who do not file their claims within the timelines specified in the Public Announcement end up preferring an IA before the Adjudicating Authority to enforce the same, thus not only inflating the CIRP Cost to fund defense against groundless litigations; but also delaying the Approval of Resolution Plans, thereby defeating the intent of the Insolvency & Bankruptcy Code.

Unfortunately, the recently introduced Regulation 6A in IBBI (Insolvency Resolution Process for Corporate Persons) Regulations [vide No. IBBI/2022-23/GN/REG093] has added to the worries of Resolution Professionals, since it in-effect casts an obligation on the RP to ring-fence someone who was sleeping over his right to timely file a claim, and further it has given legal backing to the lazy creditor for enforcing such claims, something which is against the spirit of the Code which envisages time-bound Resolution.

Though this Regulation in practice is a nightmare for the IRP/RP handling CIRP, particularly for a large conglomerate having multiple layers of claims; but at this stage, those are not being adverted to as a ground to arraign the Regulation. This article is pin-pointed to uncover why the introduction of the said Regulation is bad in law; and further, it will be discussed that even if this Regulation is disregarded by the IRP/RP, why no adverse consequences may follow from the Adjudicating Authority.

Part-I

CODE DECODED

The infirmities in Regulation 6A of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations which in-effect is bad in law is prima-facie evident on a plain reading of Sec. 18 of IBC, which lists out the Responsibilities on an IRP, reproduced as under:

“18. The interim resolution professional shall perform the following duties, namely: —

(a) collect all information relating to the assets, finances and operations of the corporate debtor for determining the financial position of the corporate debtor, including information relating to —

(i) business operations for the previous two years;

(ii) financial and operational payments for the previous two years;

(iii) list of assets and liabilities as on the initiation date; and

(iv) such other matters as may be specified;

(b) receive and collate all the claims submitted by creditors to him, pursuant to the public announcement made under sections 13 and 15;

(c) constitute a committee of creditors;

(d) monitor the assets of the corporate debtor and manage its operations until a resolution professional is appointed by the committee of creditors;

(e) file information collected with the information utility, if necessary; and

(f) take control and custody of any asset over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor, or with information utility or the depository of securities or any other registry that records the ownership of assets including —

(i) assets over which the corporate debtor has ownership rights which may be located in a foreign country;

(ii) assets that may or may not be in possession of the corporate debtor;

(iii) tangible assets, whether movable or immovable;

(iv) intangible assets including intellectual property;

(v) securities including shares held in any subsidiary of the corporate debtor, financial instruments, insurance policies;

(vi) assets subject to the determination of ownership by a court or authority;

(g) to perform such other duties as may be specified by the Board.

Explanation.—For the purposes of this 1[section], the term “assets” shall not include the following, namely:—

(a) assets owned by a third party in possession of the corporate debtor held under trust or under contractual arrangements including bailment;

(b) assets of any Indian or foreign subsidiary of the corporate debtor; and

(c) such other assets as may be notified by the Central Government in consultation with any financial sector regulator.”

A bare reading of Section 18 suggests that nowhere did the Legislature in its collective wisdom while enacting the provisions governing roles & responsibilities in the Insolvency & Bankruptcy Code envisage any obligation wherein the IRP/RP would be required to go through the last available books of accounts of the corporate debtor for the purpose of sending any communication to the creditors featuring therein. Therefore, the introduction of Regulation 6A in IBBI (Insolvency Resolution Process for Corporate Persons) Regulations is enlarging the scope of Section 18 of IBC by creating obligations beyond the statute, hence ultra-vires, as per the Hon’ble Supreme Court ruling in Union of India v. S. Srinivasan, (2012) 7 SCC 683,

Para 21: … If a rule supplants any provision for which power has not been conferred, it becomes ultra vires. The basic test is to determine and consider the source of power which is relatable to the rule. Similarly, a rule must be in accord with the parent statute as it cannot travel beyond it.

It also cannot be the case that while enhancing the ambit of operation of Section 18 of IBC, the said Regulation is giving effect to the intent of the Legislature, since as was ruled by the Hon’ble Supreme Court in Maharashtra State Financial Corpn. v. Jaycee Drugs and Pharmaceuticals (P) Ltd. (1991) 2 SCC 637 – Para 16, it is a settled rule of interpretation of statutes that if the language and words used are plain and unambiguous, full effect must be given to them as they stand and in the garb of finding out the intention of the legislature no words should be added thereto. Therefore, when the legislature in Section 18 of IBC has not used any language indicating the responsibility of the IRP/RP to go through the last available books of accounts of the corporate debtor for the purpose of sending any communication to the creditors featuring therein, the obligation being imposed in the form of Regulation is ultra-vires & cannot be justified in law.

In this context, apropos to cite the ruling in Mango Meadows Agricultural Pleasure Land V/s Union of India & Ors. – WP(C) No. 7444 OF 2022, (2022) ibclaw.in 243 HC wherein the Hon’ble Kerala High Court reiterated that it has to be presumed that the legislature understands and correctly appreciates the needs of its own people and the discrimination, if any, is based on adequate grounds… i.e., any discrimination has to form a part of the Statute only and can never be introduced as Regulation unless such power has been specifically conferred.

The fact that the legislature in enacting IBC never intended any sub-classification or discriminatory treatment between the Creditors/ Claimants featuring in the last available books of accounts of the corporate debtor vis-à-vis the claims submitted pursuant to Public Announcement can also be gauged from the plain meaning of the language used in enacting Section 18(a) of IBC, where the requirement of collection of all information relating to the assets, finances, and operations of the corporate debtor by the IRP was only for the determination of ‘financial position of the corporate debtor’ and nothing else. Therefore, introducing the mandate of differential treatment conferred to certain Creditors, something which was never intended by the Legislature while enacting the statute thereby renders Regulation 6A of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations to be Bad in Law.

To conclude, I understand that maybe the said amendment to the CIRP Regulation was introduced to align with some demands by a certain section of the claimants, but the disconnect arises by introducing new rights not considered by the Legislature; an act which is in conflict with the ratio of Hon’ble Supreme Court ruling in Global Energy Ltd. V/s Central Electricity Regulatory Commission, (2009) 15 SCC 570 – Para 25, wherein it was held that the regulation-making power cannot be exercised so as to bring into existence substantive rights or obligations or disabilities which are not contemplated in terms of the provisions of the said Act.

The introduction of this Regulation is perhaps a case that can be best described in the words of Abraham Maslow – “If the only tool you have is a hammer, it is tempting to treat everything as if it were a nail.”.

 

 

PART – II

If a law is unjust a man is not only right to disobey it, he is obligated to do so.

— Thomas Jefferson

Martin Luther King, Jr., the most renowned advocate of civil disobedience, argued that civil disobedience is not lawlessness but instead a higher form of lawfulness, designed to bring positive or man-made law into conformity with higher law. In this part, the higher law that is being put forth to be conformed by IRP/RP is the Insolvency & Bankruptcy Code, a statute passed by the Parliament.

But as things stand today, the fundamental question is, in case during the course of CIRP if Regulation 6A of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations is not followed, is the IRP/RP on the wrong side of the law, inviting consequences from the Adjudicating Authority!!! The answer to this question has been perfectly summed up in the Hon’ble Supreme Court ruling in Bharathidasan University v. All-India Council for Technical Education, (2001) 8 SCC 676, wherein it was ruled that Courts are bound to ignore regulations made outside the confines of the statute; extract from the ruling infra:

Para 14: The fact that the Regulations may have the force of law or when made have to be laid down before the legislature concerned does not confer any more sanctity or immunity as though they are statutory provisions themselves. Consequently, when the power to make regulations is confined to certain limits and made to flow in a well-defined canal within stipulated banks, those actually made or shown and found to be not made within its confines but outside them, the courts are bound to ignore them when the question of their enforcement arises and the mere fact that there was no specific relief sought for to strike down or declare them ultra vires, particularly when the party in sufferance is a respondent to the lis or proceedings cannot confer any further sanctity or authority and validity which it is shown and found to obviously and patently lack. …

The grounds because of which the Regulation 6A of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations is being said to exceed the confines of IBC statute is iterated in the first part of this series – CODE DECODED, hence repetition is avoided here.  What is also emphatic from the ratio of the ruling in Bharathidasan University’s case is that a separate challenge to the vires of the Regulation is not mandatory for the Adjudicating Authority to ignore the existence of the said Regulation.

To conclude, the words of Hon’ble NCLT – Mumbai Bench (Ld. Member/s Sh. Bhaskara Pantula Mohan & Sh. V. Nallasenapathy) in the matter of ICICI Bank v. Unimark Remedies Ltd. – MA No. 1529 of 2018 in CP No. 197/2018, (2018) ibclaw.in 83 NCLT perfectly resolves the imbroglio between the operation of the Code & the Regulation ‘when there is a clash/ conflict between the Regulations and the Code, the object of the Code is paramount and not the Regulations which are formed only for the just implementation of the Code … the spirit of the Code is first and then comes the other things’.

 

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