NCLAT: The Insolvency and Bankruptcy Code, 2016 is not applicable to NBFCs August 21, 2019
Published in: Between The Lines
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Mr. Arpit Sinhal
Ms. Batul Barodawala
Mr. Mahim Sharma
Mr. Drushan Engineer
Ms. Ishita Mishra
The National Company Appellate Law Tribunal (“NCLAT”) has, in the case of Housing Development and Finance Corporation Limited v. RHC Holding Private Limited (decided on July 10, 2019) held that the provisions of the Insolvency and Bankruptcy Code, 2016 (“Code”) are not applicable to ‘non- banking financial institutions’ (“NBFCs”).
Housing Development and Finance Corporation Limited (“Appellant”) challenged the December 6, 2018 order of the Principal Bench of National Company Law Tribunal (“NCLT”), which had dismissed its insolvency plea against RHC Holding Private Limited (“Respondent”), observing that it was an NBFC and hence, does not come under the purview of the Code. The Appellant had moved the NCLT to recover an amount of INR 41 crores due from the Respondent.
The Respondent argued that the NCLT had rightly rejected the application of the Appellant since the Respondent is a ‘financial service provider’ and is excluded from the definition of Corporate Person as per Section 3(7) of the Code. The Respondent also relied on the NCLAT’s decision in the case of Randhiraj Thakur v. M/s Jindal Saxena Financial Services (decided on September 18, 2018) wherein it was held that an insolvency petition filed against an NBFC is not maintainable.
Section 3(7) of the Code is reproduced below:
“’corporate person’ means a company as defined in clause (20) of section 2 of the Companies Act, 2013 (18 of 2013), a limited liability partnership, as defined in clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008 (6 of 2009), or any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider;” (emphasis supplied)
The term ‘financial service provider’ has been defined in Section 3(17) of the Code as:
“’financial service provider’ means a person engaged in the business of providing financial services in terms of authorisation issued or registration granted by a financial sector regulator;”(emphasis supplied)
The term ‘financial service’ has been defined in Section 3(16) of the Code as:
“’Financial service’ includes any of the following services, namely-
(a) Accepting of deposits;
(b) Safeguarding and administering assets consisting of financial products, belonging to another person, or agreeing to do so;
(c) Effecting contracts of insurance;
(d) Offering, managing or agreeing to manage assets consisting of financial products belonging to another person;
(e) Rendering or agreeing, for consideration, to render advice on or soliciting for the purposes of-
(i) Buying, selling or subscribing to, a financial product;
(ii) Availing a financial service; or
(iii) Exercising any right associated with a financial product or financial service;
(f) Establishing or operating an investment scheme;
(g) Maintaining or transferring records of ownership of a financial product;
(h) Underwriting the issuance or subscription of a financial product; or
(i) Selling, providing, or issuing stored value or payment instruments or providing payment services;”
The Appellant argued that the Respondent is not a ‘financial service provider’. According to the Appellant the intent and the purpose of the legislature is to specifically carve out a set of institutions that provide set of identified financial services. The exclusion cannot be beyond what has been contemplated by the Code. The Code is applicable to all entities other than those which are specifically engaged in business of providing ‘financial services’ under the Code.
It was further argued by the Appellant that the Respondent is a holding company, which invests in shares, bonds, debentures, debts or loans in group companies and gives guarantees on behalf of group companies. Being a holding company, the Respondent is a separate entity altogether. Thus, the services being provided by the Respondent constitute offering and managing assets consisting of financial products belonging to another person, which cannot be equated to financial services as defined above.
OBSERVATIONS OF THE NCLAT
The NCLAT observed that the definition of ‘financial service’ if read with definition of ‘financial service provider’, clarifies that it is not necessary that the ‘financial service providers’ must accept deposits. It was further held that the definition of ‘financial services’ as defined in Section 3(16) of the Code is not limited to the nine activities as shown in sub-clause (a) to (i) of Section 3(16) of the Code. The sub-clauses are inclusive which mean that there can be other services which come within the meaning of ‘financial services’. Further, reliance was placed on the registration certificate issued by the Reserve Bank of India (“RBI”) to commence business of ‘non-banking financial services’, except the acceptance of public deposits. The NCLAT additionally relied on Section 45-I of the Reserve Bank of India Act, 1934 which defines the meaning of an NBFC.
DECISION OF THE NCLAT
The two-member bench headed by Chairman Justice S J Mukhopadhaya upheld the order of the NCLT which had rejected the Appellant’s plea. The NCLAT held that it found no merits in the Appellant’s petition and further stated that the Respondent comes under the purview of the RBI and remedies should be sought from the RBI and not the bankruptcy court.
Vaish Associated Advocates View
The NCLAT in this case laid down the cardinal principle that NBFCs, irrespective of their functions, shall not come under the purview of the Code. It has liberally interpreted the definition of ‘financial services’ provided in the Code and has stated that even if an entity that does not undertake the activities enumerated in Section 3(16) of the Code, it can be considered a financial service provider, as the definition provided is not exhaustive in nature.
In this context, it is pertinent to take note of Section 227 (Power of Central Government to notify financial sector providers, etc.) of the Code, which states that the Central Government has the power to notify certain categories of the financial service providers who may be subject to the provisions of the Code. Till date, no such notification has been issued by the Central Government. However, this can be used as a tool to bring such companies into the ambit of the Code as and when the Central Government deems fit.
It is also imperative to note that financial service providers constitute a significant segment of our economy, wherein public funds are involved. In an event where insolvency proceedings are initiated against these entities, this may result in a cascading effect on the economy, hence these entities have been excluded from the ambit of the Code.
For more information please write to Mr. Bomi Daruwala at [email protected]DOWNLOAD NEWSLETTER