The Insolvency and Bankruptcy Code, 2016 (the “Code“) was passed by the Parliament on May 5, 2016 and received the assent of the President of India on May 28, 2016. The Code superseded the earlier statutes on insolvency, bankruptcy and revival viz., The Provincial Insolvency Act, 1920 and The Presidency Towns Insolvency Act, 1909 which both dealt with the insolvency of individuals and The Sick Industrial Companies (Special Provisions) Act, 1985 dealing with detection of sick industrial companies and the remedial measures to be taken in respect thereto. However, the procedures prescribed under the aforementioned statutes proved to be lengthy and cumbersome, thus defeating the very objective of bankruptcy or revival. This deficient insolvency regime did nothing to bolster the confidence of creditors, many of whom were already saddled with defaulting debtors.

It was evident that substantial statutory amendments were the need of the hour to aid creditors in the speedy recovery of their dues and to attract investment from various corners of the world to boost economic growth. The long overdue revamp of insolvency laws finally saw the light of day in 2016 with the coming into force of the Code. The Code offered time bound resolution of insolvency proceedings as well as offered an opportunity to unsecured creditors to initiate such proceedings. In one of the most significant additions, the Code has formally introduced the concept of Information Utilities. The term “Information Utility” has been defined under Section 3(21) of the Code as under:

In essence, an Information Utility is an entity storing detailed credit information about debtors. This article seeks to highlight the functions to be performed by the Information Utilities and the role to be assumed by them in insolvency proceedings.

At this juncture, it would be pertinent to highlight the inherent differences between an Information Utility (as envisaged under the Code) and the central registry constituted under the provisions of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI“).

CERSAI VERSUS INFORMATION UTILITY

The Central Registry of Securitization Asset Reconstruction and Security Interest of India (“CERSAI“) was constituted with the primary intention of preventing mortgage frauds wherein multiple mortgages would be created in favour of multiple lenders over the same property by use of fraudulent title deeds. Initially, only the details of mortgage by deposit of title deeds i.e., equitable mortgages were required to be filed with CERSAI. However, pursuant to an amendment to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Central Registry) Rules, 2011 (“SARFAESI Rules“), now particulars of creation, modification or satisfaction of security interest by any type of mortgage, hypothecation of plant and machinery, stocks, debt, receivables, intangible assets, knowhow, patent, copyright, trade mark, licence and franchise also require registration with CERSAI.

Despite the above amendment, there are no provisions in SARFAESI or the SARFAESI Rules which necessitate the utilization of the information available with CERSAI. In stark contrast, the Code clearly stipulates that the records of an Information Utility may be accessed by the liquidator and interim insolvency professional in furtherance of their functions under the Code. There is a great degree of importance accorded to the information stored with an Information Utility under the Code, which is discussed below. Further, the scope of the Code is much wider than that of SARFEASI. The provisions of SARFAESI are applicable only to banks and certain financial information whereas an action under the Code may be initiated by any creditor which includes within its scope any person to whom a debt is owed. The provisions relating to Information Utilities as enumerated under the Code are briefly discussed below.

The Code stipulates that the services rendered by an Information Utility shall be considered as “core services” if the same entail inter alia acceptance of financial information, authentication of the information received and provision of access to the information available with it. The term “financial information” has been defined under Section 3 (13) of the Code inter alia as information of a person relating to its debts, liabilities, defaults committed and balance sheets and cash flow statements.

One will find references to “financial creditors” and “operational creditors” throughout the Code. A financial creditor is one to whom a financial debt (i.e. money borrowed, bonds, debentures etc.) is owed and an operational creditor is one to whom an operational debt (i.e. claim in respect of provision of goods and services) is owed.

On the other hand, the same is not mandatory for operational creditors.

RELIANCE ON THE RECORDS OF INFORMATION UTILITIES

Whilst initiating the corporate insolvency resolution process, the records of default available with an Information Utility may be submitted by the financial creditor along with the application for the same. The submission of such records is a prerequisite to initiating the process of fast track corporate insolvency resolution process.

The benefit of submitting information to the Information Utility is further highlighted in the fact that failure on the part of a financial creditor to submit information to the Information Utility regarding a claim made to the liquidator, would deprive the financial creditor of the advantage offered to it viz., non-submission of documents supporting the claim, thus requiring the financial creditor to follow the procedure to be adhered to by an operational creditor.

This is definitive in establishing the position accorded to Information Utilities in due recognition of the crucial role to be assumed by such organizations in insolvency proceedings.

INTENT BEHIND SET UP OF INFORMATION UTILITIES

The Report of the Working Group on Information Utilities, Ministry of Corporate Affairs (“Report“) throws light on one of the significant reasons for establishing Information Utilities. Establishment of indebtedness is the crux of any proceeding for recovery. Ascertaining the same would be time consuming and would potentially delay the procedure for assessing the viability of the debtor. Having a system in place where the information of each and every debtor is stored, along with the history of defaults committed thereto, would greatly aid and reduce the already overburdened judiciary in taking swift action and providing relief to creditors

It is not mandatory to submit details of defaults committed by the debtors to CIBIL, however in the event such details are communicated, the only consequence of the same is a drop in the credit score of such individual/entity.

Another point highlighted in the Report is that since the information to be filed with the Information Utility is required to be authenticated by all the parties to that transaction, the parties would be stopped from denying the same at a later stage. This theory finds place in the Code wherein it is stipulated that where an application filed by a creditor for a debt has been registered with an Information Utility, the same cannot be denied by the debtor at a later stage.

The manner of registration of an Information Utility, submission of information and access to the same are more particularly detailed in the Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017 (“Regulations“).

The Regulations lay down the criteria to be met with by an entity seeking registration as an information utility under the Code. One of the most pertinent requirements is that only a public company (meeting the conditions laid down under Rule 3 of the Regulations) may be registered as an Information Utility. The first step is to be obtain the in-principle approval of the Insolvency and Bankruptcy Board of India (the “Board“), which may be granted up to a maximum period of 1 (One) year. During the validity of the in-principle approval, the entity may make an application for the certificate of registration, which may be granted subject to compliance with the Regulations. The maximum period for which the registration is valid is 5 (Five) years.

ACCESS TO RECORDS OF AN INFORMATION UTILITY

The Regulations also prescribe certain minimum standards to be met with and procedures to be adhered to by Information Utilities relating to the manner in which information is accepted, stored and accessed by registered users. The Regulations mandate that access to the records of an Information Utility are limited to inter alia(i) registered users who have been granted a unique identification number by the Information Utility who have submitted information, (ii) all parties to a particular debt transaction, (iii) the insolvency professional, (iv) the NCLT, and (v) the Board. Further, upon receipt of information of a default, the Information Utility is bound to authenticate the same and communicate such default to the creditors of the defaulting debtor and any other parties/sureties in respect of the debt.

This is important in ensuring that the information may not be misused or tampered with. Further, by placing an obligation on Information Utilities to communicate instances of default, the chances of swift action to be taken by a creditor have greatly increased.

The Regulations also lay various compliances to be observed by Information utilities including but not limited to submission of annual reports to the Board containing details of registered users, debts and defaults, among other details. Information Utilities are bound to have adequate risk management systems in place to ensure that none of the information stored with them is lost or damaged.

ROC & CERSAI FILING TO BE SUBMITTED TO INFORMATION UTLITIES

It is pertinent to note that in the proforma of the form (containing the details of financial/ operational debt) being Form C under the Schedule to the Regulations, under the section containing details of the security interest created, copies of the certificate of registration of charge (issued by the Registrar of Companies) and the proof of registration with CERSAI are also to be submitted.

This would be extremely useful whilst initiating recovery or insolvency proceedings enabling the adjudicating authority to simply rely on the information available with the Information Utility instead of spending time ascertaining whether the necessary registrations have been made under applicable law.

Sections 209 – 216 under Chapter V of Part IV of the Code deal with Information Utilities. Save and except Section 216 which allows for modification of the financial information submitted to an Information Utility in terms of Section 215, the remaining sections dealing with Information Utilities are in force.

We understand that NeSL is in the process of formally launching their operations shortly. We would recommend that pursuant to the same, all financial and operational creditors should comply with the filing obligations under the Code, in the manner as set out in detail in the Regulations.

In conclusion, one may state that the Code read with the Regulations contain comprehensive provisions on the functioning and obligations of Information Utilities.

The success of NeSL would be a strong indicator of the role such organizations would play in insolvency proceedings going forward.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.