In our series so far, we’ve examined the information problem in the current insolvency process. We’ve also looked at how information utilities can solve this problem.
In this post, we will put on our legal goggles - and examine the legal framework in which IUs or Information Utilities exist. Our main aim will be to answer the question - are IUs mandatory?
How does the IBC define an Information Utility?
The “definitional clause” - Section 3(21) defines an “information utility” as “a person who is registered with the Board as an information utility under Section 210”
Section 210 lays down a basic procedure governing the process by which a “person” can apply to the “Board” (IBBI) to become an Information Utility.
The IBBI has more specific regulations detailing the stringent requirements an organization must meet to become an Information Utility.
None of these provisions really tell us how an Information Utility works under law. All they do is lay down the requirements and process by which an organization can become an Information Utility.
What if we look at provisions where the “utility” of an Information Utility really kicks in?
Information Utilities in the Corporate Insolvency Resolution Process
The 2 most important provisions for the Corporate Insolvency Resolution Process are Section 7, and 9 of the IBC. They lay down the process by which various entities can initiate an insolvency resolution process against a defaulting corporate entity.
In essence, they lay down the framework for the “limited adversarial setup” we referred to in our last two posts.
Section 7 describes the ways in which a financial creditor (lenders etc.) can initiate a CIRP.
Under Section 7(3)(a):
Section 9 (ways in which an operational creditor can initiate CIRP) has a similar provision.
Section 9(3)(d) states that an Operational Creditor shall furnish:
Both provisions confirm what we learnt in the last post - that an Information Utility is a record/repository of critical information pertaining to the debt.
But neither provisions indicates whether storage of information with an Information Utility is mandatory.
For this we need to examine another provision.
Are Information Utilities mandatory?
Section 215 governs submission of financial information to an “information utility”.
Sub-section 1 merely states that any submission of information to an IU must comply with applicable regulations laid down by the IBBI. Nothing controversial or particularly enlightening here.
Sub-sections 2 and 3 are more interesting.
Sub-section 2 states that a “financial creditor shall submit” financial and security information to an IU in accordance with regulations.
Sub-section 3 states that an “operational creditor may submit” financial information as per the regulations.
There are three possible ways to read the difference:
- The words “shall” and “may” both convey that it is optional for a financial creditor and an operational creditor to submit information to an IU
- The words “shall” and “may” both convey that it is mandatory for a financial creditor and an operational creditor to submit information to an IU
- The word “shall” conveys that it is mandatory for a financial creditor to submit information to an IU. The word “may” conveys that it is optional for an operational creditor to submit information to an IU.
So how do we pick the correct option?
Principles of legislative interpretation dictate that a difference in terminology in the same provision cannot be a mere colloquial difference - but rather a tangible, material difference on the operation of law.
The word “shall” being used in Sub-section 2 and the word “may” being used in Sub-section 3 are, therefore, not trivial differences. They connote a tangible difference.
So the only correct option can be (C).
It is mandatory for a financial creditor to submit financial information to an Information Utility but it is optional for an operational creditor to submit financial information to an Information Utility.
When does a financial creditor need to submit financial information to an Information Utility?
As we discovered in our last post, the Information Utility’s functions kicks in at the stage of ‘creation of the debt’ and execution of documentation.
Therefore, the “mandatory submission” required under Section 215 would also kick in at this stage.
That is why NeSL - India's first Information Utility - has ALSO built a Digital Document Execution platform to supplement its Information Utility repository. It wants to enable a seamless flow of compliance - from execution to storage.
We will examine the contours of this platform in our next post.
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