An Analysis of Default Evidence under IBC, 2016: Key Provisions, Judicial Interpretations, and Procedural Requirements

The initiation of the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC), 2016, represents a significant mechanism for financial creditors seeking to address defaults by corporate debtors. Section 7 of the IBC outlines the framework within which financial creditors can file an application before the National Company Law Tribunal (NCLT). This write-up delves into the key statutory provisions, rules, and regulations that guide the process of proving default, examines the judicial interpretations that have shaped these provisions, and details the procedural requirements for generating a record of default through Information Utilities (IUs). The analysis is anchored on the pivotal judgment of the National Company Law Appellate Tribunal (NCLAT) in the case of Vijay Kumar Singhania v. Bank of Baroda and Anr[1]., which has been recently upheld by the Supreme Court of India.

Section 7 of the IBC, 2016, is the cornerstone for initiating CIRP by financial creditors. It provides the procedural requirements, and the nature of evidence required to prove a default.

• Section 7(2) mandates that a financial creditor must file an application in a prescribed form and manner, accompanied by the relevant fee.
• Section 7(3) requires the financial creditor to furnish:
  • A record of the default recorded with an Information Utility (IU), or
  • Other records or evidence of default as specified by regulations.

Regulatory Guidelines

• The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016:
  • Rule 4 specifies that the application by a financial creditor must be in Form 1, accompanied by relevant documents as required under the IBC and its regulations.
• IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016:
  • Regulation 2A allows financial creditors to submit various forms of evidence to prove default, such as:
    • Certified copies of entries in the relevant account in the bankers’ book.
    • An order from a court or tribunal adjudicating the non-payment of a debt.
  • Information Utilities (IU) Regulations, 2017:
    • Regulation 20(1A) (amended w.e.f 14.06.2022) requires that a financial creditor file information of default with the IU before initiating CIRP.

Judicial Interpretations

The NCLAT’s judgment in Vijay Kumar Singhania v. Bank of Baroda and Anr[2]. clarified the evidentiary requirements under Section 7 of the IBC. The key issues addressed include:

• Mandatory Filing with IU: The NCLAT held that while the record of default with an IU is important, it is not mandatory. Financial creditors can provide other forms of evidence, such as certified entries in bankers’ books, court orders, or financial contracts.
• Regulation 20 of IU Regulations: The NCLAT clarified that Regulation 20(1A) does not override Section 7 of the IBC. Financial creditors are not limited to IU records but can submit alternative evidence as specified in the CIRP Regulations and the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (AAA Rules).
• Counterclaims and Money Suits: The NCLAT ruled that the existence of a counterclaim or money suit by the corporate debtor does not negate the existence of a financial debt or default. CIRP can be initiated if the creditor provides sufficient evidence of default.

This judgment has been recently upheld by the Supreme Court, reinforcing the flexibility provided to financial creditors under the IBC.

Legal Interpretations and Supreme Court Observations

An order dated May 12, 2020, was issued by the Registrar of the National Company Law Tribunal Principal Bench requiring all financial creditors to submit record of default from the Information Utility (hereinafter referred to as, “IU”) as a condition precedent for filing any new application under Section 7 of the IBC, 2016.

This order was challenged before the Calcutta High Court in the case of Univalue Projects Pvt. Ltd. vs. Union of India[3], where the Hon’ble Calcutta High Court held that the NCLT acted beyond its jurisdiction by issuing an order that contravened Section 7(3)(a) of the IBC, 2016, and conflicted with Rule 4 of the AA Rules, 2016, as well as Regulation 8 of the CIRP Regulations, 2016. The court clarified that financial creditors have the flexibility to submit either a record of default from an Information Utility (IU) or other specified documents to establish a financial debt. This ruling highlighted that Section 215 of the IBC, which relates to the role of IUs, is not mandatory, allowing creditors to use a broader range of evidence to prove default. the requirement was directory, not mandatory.

This was followed by the introduction of Regulation 2A, reinforcing the option for financial creditors to provide alternative evidence of default. The Supreme Court in Swiss Ribbons Pvt. Ltd. vs. Union of India (2019)[4] affirmed that while information from information utilities is significant, financial creditors can also rely on other forms of evidence such as certified bank statements or court orders to prove default. The Court emphasized that the CIRP framework is designed to balance the interests of creditors and debtors while ensuring that defaults are swiftly addressed.

Type of Documents that can be used to substantiate the Default

The following documents can be used to substantiate the claim of default:

• Certified copies of entries in the relevant account in the bankers’ book as defined in the Bankers’ Books Evidence Act, 1891.
• An order from a court or tribunal that has adjudicated the non-payment of a debt, provided the period for appeal has expired.
• Records with an information utility (IU), which is a primary form of evidence but not mandatory as per recent judgments and amendments.
• Records available with any credit information company as evidence of default.
• Copies of entries in a banker’s book in accordance with the Bankers’ Books Evidence Act, 1891.

 Background and rational for the Role of IU in issuance of Record of Default

The Bankruptcy Law Reforms Committee (BLRC), which conceptualized the Insolvency and Bankruptcy Code (IBC), 2016, envisaged a competitive industry of inter-operable Information Utilities (IUs) rather than a centralized depository managed by the State. The Committee emphasized the need for accurate and undisputed information about credit, collateral, and other financial details before the initiation of the Insolvency Resolution Process (IRP). The BLRC’s rationale was that delays caused by disputes over such information could undermine the objective of completing the IRP within the stipulated 180 days. The establishment of a competitive IU industry was seen as a solution to provide undisputed and complete information swiftly, thereby avoiding delays in the IRP. The BLRC also discussed the importance of certain categories of information being readily accessible to ensure a swift and efficient resolution process.

About NeSL

The concept of IUs within the IBC ecosystem draws inspiration from the broader vision of centralized and secure data management, as seen in initiatives like the National Assets Depository Ltd (NADeL) Project. This project, supported by major financial institutions and government bodies, aimed to create a unified platform for managing and accessing various types of assets, leveraging digital technology to provide citizen-centric services. Similarly, IUs under the IBC was also envisioned as a competitive industry that would not only store financial information but also ensure its accuracy, availability, and authenticity.

The establishment of National E-Governance Services Limited (NeSL) as an IU was a step toward augmenting the information infrastructure in India, ensuring that IUs become integral to the effective implementation of the IBC.

Record of Default

In the backdrop of ‘time-bound’ nature of the IBC imposes strict deadlines, requiring the AA to admit or reject an application within 14 days of receiving it, the Record of Default (RoD) issued by an IU could play a crucial role in insolvency proceedings. Sections 214 and 215 of the IBC outline the obligations of IUs and mandate financial creditors to submit financial information to IUs. Additionally, Sections 7(3) and 9(3)(d) of the IBC require financial and operational creditors to file the IU record along with their application to initiate insolvency proceedings as evidence of default.

The introduction of the system of RoD within the framework of the IBC was aimed at addressing the challenges posed by the traditional methods of proving default, which were often lengthy and time-consuming due to reliance on the Evidence Act. The conventional process required substantial proof to establish default, placing a significant burden on the creditor, which could lead to delays in the admission of insolvency applications.

To overcome these challenges, the IU system was introduced. This system was designed not only to expedite the process of proving default but also to address issues related to information asymmetry and information gaps between creditors and debtors. In many instances, creditors lacked access to critical financial information that was available only to the debtor, making it difficult to prove default effectively.

The IU system aims to create a repository of verified and authenticated financial information, which can be quickly accessed by all parties involved in an insolvency proceeding. This system shifts the burden of disproving a default onto the debtor, as the existence of a RoD issued by an IU is considered prima facie evidence of default. Consequently, this should streamline the process of admitting insolvency applications, making it faster and more efficient.

However, despite its intended benefits, the IU system has not been fully or effectively utilized to its potential. The underutilization of this system means that the expected efficiencies and improvements in the insolvency process have not been fully realized, leaving room for further development and integration of the IU system into the broader insolvency resolution framework.

Procedure for Generating a Record of Default from NeSL

The NCLAT judgment in Vijay Kumar Singhania v. Bank of Baroda, upheld by the Supreme Court, provides clarity on the flexibility available to financial creditors in proving default under the IBC. The judgment emphasizes that while Information Utilities play a crucial role, they are not the exclusive method for establishing default. Financial creditors can rely on a range of documents, including certified entries in bankers’ books and court orders, to initiate CIRP.

Further, IUs play a crucial role in the IBC framework by maintaining high-quality, authenticated information about debts and defaults, thus facilitating a more efficient resolution of insolvency cases. If properly utilised, IUs can significantly reduce the asymmetry of information between creditors and debtors, expediting the insolvency resolution process.

We trust you will find this an interesting read. For any queries or comments on this update, please feel free to contact us at insights@elp-in.com or write to our authors:

Mukesh Chand, Senior Counsel – Email – mukeshchand@elp-in.com

[1] Company Appeal (AT) (Insolvency) No.1058 of 2023 decided on 13-12-2023

[2] Ibid

[3] W. P. No. 5595 (W) of 2020- Decided on 18.08.2020

[4] AIR 2019 SUPREME COURT 739, 2019 (4) SCC 17