In its joint decision dated August 18, 2020 ("Judgement") in the cases of Univalue Projects Private Limited v. Union of India [W. P. No. 5595 (W) of 2020] and Cygnus Investments and Finance Private Limited & Another v. Union of India and Others [W.P. No. 5861 (W) of 2020], the High Court of Calcutta ("HC") held that financial creditors can rely on either of the available modes of evidence to demonstrate that is, either a record of default from the Information Utility (“IU”) or any other documents as specified in the Insolvency and Bankruptcy Code, 2016 (“IBC”) to prove the existence of a financial debt.
In the instant case titled Univalue Projects Private Limited v. Union of India, the issue raised for clarification before the Court was:
Considering the Pledge Agreement and the Deed of Undertaking signed with the Lender, is the Appellant a financial creditor in relation to the Corporate Debtor?
With regard to this issue, Numerous precedents were cited, and it was noted that even though the NCLT and NCLAT have been given the authority to control their own processes, the use of these powers is constrained and subject to a number of laws and rules, including the CA or IBC's rules and regulations, as well as the principles of natural justice. The hierarchy of Indian legal standards was captured by the Supreme Court in Government of Andhra Pradesh v. P. Laxmi Devi (Smt) [(2008) 4 SCC 720] based on the legal scholar Kelsen's "Pure Theory of Law." Therefore, it was assumed that the Rules established by the Government or the Regulatory Board came after the Acts passed by the Parliament. The phrase "as may be specified" in Section 7(3)(a) of the IBC, when read with the definition of the word "specified" in Section 3(32) of the IBC, leads to the conclusion that the positive conditions separated by "or" are read in the alternative and that there are three types of evidence that may be offered. It was noted while referring to various provisions, that aside from the financial information of the IU, eight classes of documents can be considered to be sources that evidence a "financial debt." These provisions include Section 7 of the IBC read with Rule 4 of the AA Rules, Form-1 therein, Regulation 8 of the CIRP Regulations, and precedents.
The Court categorically stated that,
“The impugned order dated May 12, 2020 which abruptly imposed a mandatory prescription on financial creditors of adducing evidence of debt by way of only producing a record of default recorded with the IU, in my opinion, is a “prickly thorn” which not only goes against the principles of natural justice but also the statutory limitations inbuilt in Section 424 of the CA, 2013. The impugned order had become a fait accompli for the petitioners, which did indeed adversely affect their substantive rights as a financial creditor, as envisaged under the IBC, 2016. The very nature of the impugned order would create barriers for financial creditors and would leave them on the high seas as regards the corporate insolvency resolution process. Under the above circumstances it is apparent that the NCLT has acted without jurisdiction and exceeded its jurisdiction that is limited within the four corners of Section 424 of the CA, 2013 and Section 7(3)(a) of the IBC, 2016. Furthermore, the impugned order is clearly striking a discord with Rule 4 of AA Rules, 2016 and Regulation 8 of the CIRP Regulations, 2016. Hence, the impugned order is so patently without jurisdiction that it cannot be allowed to stand.”