National Company Law Tribunal, New Delhi (“NCLT”), vide its order dated August 2, 2023, in the case of M/s. Bezel Stockbrokers Private Limited v. Security Exchange Board of India and Another [Company Petition No. (IB)-251(ND)/2021], held that a stock broker company is a financial service provider under the Insolvency and Bankruptcy Code, 2016 (“IBC”).

Facts

An application was filed by M/s. Bezel Stockbrokers Private Limited (“Applicant”) under Section 10 (Initiation of corporate insolvency resolution process by corporate applicant) of IBC seeking initiation of the Corporate Insolvency Resolution Process (“CIRP”) against it as it has been facing hardships in carrying out its operations and incurring ample losses every year.

As per the Applicant, owing to the financial crisis, it failed to deposit the 20% margin of the total price of the stocks which was purchased by the Applicant on behalf of its clients according to the rules of Securities and Exchange Board of India (“SEBI/ Respondent”), as a result of which SEBI forfeited the amount of the shares and thus, created a significant liability of INR 3,35,84,815 towards its shareholders/ clients. Further, the advance funds like cash and collateral (unused and kept for future orders) which were given to the Applicant by the clients were also not paid back, which resulted in creation of a further liability of INR 91,78,621. Hence, the Applicant’s aggregate liability towards its clients amounted to INR 4,27,63,436.

Thus, due to increased financial distress, the Applicant has been declared as a defaulter and expelled from the National Stock Exchange membership. Therefore, it has filed the present petition for initiation of CIRP against it.

Issue

Whether a stock broker company is a corporate person under IBC and eligible for initiation of CIRP.

Arguments

Contentions of the Applicant:

It was contended by the Applicant that due to the financial crisis, it sought for initiation of CIRP. The Applicant relied upon the case of Mr. Vipul Harshad Raja v. M/s. Simandhar Broking Limited [CP (IB) No. 510/7/NCLT/AHM/2019] (“Vipul Harshad Case”), wherein it was held that the respondent merely being a company engaged in stock broking business and derivative transactions cannot be claimed to be a financial service provider since it is directly dealing with the financial products and not only rendering advice or soliciting or agreeing in that regard. Additionally, the Applicant while substantiating its case before NCLT, placed: (a) a copy of special resolution passed by members authorizing it to file an application under Section 10 (Initiation of corporate insolvency resolution process by corporate applicant) of IBC to initiate CIRP; (b) its financial statements for the financial year 2018-2019 and 2019-2020 and a copy of the provisional balance sheet for the year 2020-2021; and (c) defaulter notice issued by SEBI.

Contentions of the Respondent:

It was contended by the Respondent that Applicant is a financial service provider and therefore, it does not fall within the definition of corporate person. The Respondent, for strengthening their contention relied on the order of NCLT in the case of Globe Capital Market Limited v. Narayan Securities Limited [Company Petition No. (IB)-856(ND)/2022], wherein it was held that Narayan Securities Limited was a financial service provider as per Section 3(17) (Definition of financial service provider) of IBC, due to which, it cannot be considered a corporate person as defined under Section 3(7) (Definition of corporate person) of IBC. Accordingly, no application can be filed against a financial service provider for initiating CIRP.

Additionally, the Respondent rebutted the Applicant’s claim by stating that Vipul Harshad Case has been stayed by the National Company Law Appellate Tribunal in the case of Nitin Pannalal Shah (Suspended Director of Simandar Broking Limited) v. Vipul H Raja and Others [Comp. Appeal (AT) (Ins.) No. 379 of 2021].

Observations by the NCLT

NCLT took into consideration the definitions provided under Sections 3(15), 3(16), 3(17), 3(18) of IBC and Section 2 (Definitions) of the Securities Contracts (Regulation) Act, 1956 (“SCRA”). NCLT held that as per Section 3(15) of IBC, financial products consist of securities and various types of contracts. Further, according to Section 2 of SCRA, securities within its ambit includes shares, scrips, stocks, bonds, debentures, and debenture stocks, consequently they are treated as financial products under Section 3(15) of IBC. Also, the Applicant being a stockbroker, was dealing in the activities of buying, selling, or dealing in securities, etc., which according to Section 3(15) of IBC are financial products.

The Applicant is registered under the Securities and Exchange Board of India Act, 1992 read with SEBI (Stock Brokers and Sub-brokers) Regulations, 1992. Therefore, it was observed by NCLT that the Applicant, being a financial service provider, is subject to control and supervision of SEBI (which is a financial sector regulator according to Section 3(18) of IBC).

In a nutshell, it was observed by NCLT that as the Applicant was providing financial service according to Section 3(16) of IBC, therefore, it is a financial service provider.

Decision of the NCLT

NCLT dismissed the present application and held it to be not maintainable in respect to the CIRP. It was held by NCLT that the Applicant, being a financial service provider, does not fall within the ambit of the definition of a corporate person under Section 3(7) of IBC and is not a corporate debtor under Section 3(8) of IBC.

Hence, a stock broker company will be considered as a financial service provider and not a corporate person under the scope of IBC.

VA View:

NCLT has rightly held that the Applicant is a financial service provider and thus, kept it outside the purview of corporate person as defined under Section 3(7) of IBC.

On perusal of the definitions under Section 2 of SCRA, it can be observed that shares, scrips, stocks, bonds, debentures, debenture stocks, etc., are included under the term securities. Hence, the same can also be treated as a financial product as defined under Section 3(15) of IBC. The Applicant providing the financial service qualifies as a financial service provider and is registered with SEBI. Therefore, it is outside the purview of the definition of a corporate person as defined under Section 3(7) of IBC and is not a corporate debtor in terms of Section 3(8) of IBC.

The National Company Law Appellate Tribunal in the case of Nitin Pannalal Shah (Suspended Director of Simandar Broking Limited) v. Vipul H Raja and Others [Comp. Appeal (AT) (Ins.) No. 379 of 2021] on September 11, 2023, has overruled the Vipul Harshad Case and held that such stock broking companies are financial service providers and therefore cannot be qualified as corporate person for the purpose of IBC.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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