NCLT Hyderabad Declares Stock Brokers As Financial Service Provider, Petition Under Section 9 Not Maintainable

Brief Facts

M/s. Karvy Stock Broking is a registered company under the provisions of the Companies Act, 1956 and provides stock broking and research advisory services in India. The corporate debtor entered into an agreement with the operational creditor on April 20, 2011 wherein the operational creditor undertook to provide Security and Housekeeping services at offices of the corporate debtor and its group of companies. The operational creditor served a demand notice on June28, 2021 asking for the payment due to the tune of Rs. 1,07,63,333 from the corporate debtor. The first default in making the payment occurred on October 1, 2019 for the invoices raised on July 31, 2019 and August 31, 2019. Thereafter this default continued. Operational debt fell due on the expiry of 30 days from the issuance of each invoice.

Contention of Both Parties

It was submitted by the respondent that the petition is not maintainable as it is a financial service provider and not a corporate person as defined under section 3(7) of the IBC. The respondent is registered stock broker with the SEBI and stockbrokers fall within the ambit of financial services provider under section 3(17) of the IBC. It was further contended that since the respondent does not fall within the definition of the corporate debtor, CIRP cannot be initiated against it by the operational creditor under section 9 of the IBC. It was next submitted that the total amount claimed by the operational creditor did not cross the threshold limit as provided under section 4 of the IBC because in the petition interest has also been claimed for which the respondent never agreed to pay. If the interest claimed is excluded, the principal amount falls below the threshold limit rendering the petition not maintainable.

Per Contra, it was argued by the operational creditor that the SEBI order did not exempt the respondent from insolvency proceedings initiated against it at the time of filing the petition. It was further submitted that the respondent was liable to pay interest on the principal amount under MSME Act. Since the operational creditor is registered under the MSME, as per section 16 and 17 of this act it is entitled to claim interest at three times the bank rate for the delayed payment as notified by the Reserve Bank of India (RBI). It was contended by the operational creditor that the claim for interest was valid rendering them eligible to file petition under section 9 of the IBC as the amount claimed crossed the threshold limit.

NCLT's Analysis

The NCLT observed that financial service providers do not fall within the definition of corporate person as defined under section 3 (7) of the IBC therefore the CIRP cannot be initiated against them under section 9 of the IBC by the operational creditor. The Tribunal relied on the judgment of Globe Capital Market Ltd. vs. Narayan Securities Ltd. delivered by the NCLAT wherein this principle was established. The Tribunal held as under:

“However, the financial service provider is not included in the definition of corporate person and accordingly an application cannot be filed for initiation of CIRP against the financial service provider. Here, we may also profitably refer to the decision of Hon'ble NCLAT in Globe Capital Market Ltd. vs. Narayan Securities Ltd. Company Appeal (AT) (Insolvency) No.32 of 2024 & I.A No. 62 of 2024”.

It was further noted by the NCLT that since the respondent is registered with National Stock Exchange, Bombay Stock Exchange and SEBI, its services are a financial product under section 3(15) of the IBC therefore it is deemed to be a financial services provider under section 3(16) (e) of the IBC. The Tribunal stated as under:

“The Respondent is a stockbroker and was also a member registered with National Stock Exchange of India Ltd, BSE Ltd and SEBI. For its stock broking activities. Stock broking is a 'financial product' as defined under Section 3(15) of IBC and therefore the Respondent is deemed to be a financial service provider under Section 3(16)(e)”.

The NCLT rejected the contention of the operational creditor that the respondent was not providing financial services at the time of filing the petition because it had been prohibited by the SEBI order dated November 11, 2019 from accepting new clients for its stockbroking activities. The tribunal held that the respondent was merely prohibited from stockbroking activities. Its certificate of registration issued by the SEBI was not either cancelled or suspended when the petition was filed therefore the plea of the operational creditor is meritless. The Tribunal observed as under:

“However, this contention of the Applicant is meritless because SEBI's restrictions were limited to prohibiting the Respondent from taking on new clients for stockbroking activities. As per the Certificate of Registration issued by SEBI, it is explicitly stated that the Certificate remains valid unless it is suspended or cancelled in accordance with the regulations. The Hon'ble Tribunal finds no evidence of any suspension or cancellation of the Respondent's registration earlier than 31.05.2023 (i.e., order of cancelling the Registration of the Respondent) which is later than filing of the present petition (i.e.,10.12.2021) and the date of default”.

The NCLT further observed that the date when the claimed amount became due has not been provided by the operational creditor. Additionally, as per the agreement the payment had to be made within 60 days from the issuance of an invoice. It cannot be said that the claim was continuous rather each bill had a separate cause of action. The NCLT further noted that the contract did not stipulate for the interest amount to be paid on the delayed amount therefore it cannot be claimed by the operational creditor to meet the threshold limit under section 4 of the IBC. Furthermore, the operational creditor is not entitled to claim interest under the MSME Act as it is not registered under this act. It was held as under:

“When the interest is not part of the contract between both the parties, the Operational Creditor cannot claim that part to bring the case within threshold limit. Here, we want to refer to the decisions in Swastic Enterprises v. Gammon India Limited [2018] ibclaw.in 46 NCLAT and S Polymers v. Kanodia Technoplast Limited [2019] ibclaw.in 193 NCLAT and Mr. Prashat Agarwal v. Vikash Parasrampuria and Anr. Company Appeal (AT) (Insolvency) No.690 of 2022, ibclaw.in 590 NCLAT. The Applicant is also not entitled for the benefits under the MSME Act because it is not registered under the said Act. Therefore, amount due from the Respondent is only Rs.91,21,469/-“.

It was further held that:

“Threshold limit for filing petition under Section 9 IBC is Rs.1 Crore as per Section 4 of IBC. If the interest component is excluded from the total claim, the claimed amount will be below statutory limit”.

It was further observed that 25 invoices to the tune of Rs. 37,99,693 out total invoices fell within the prohibition period between March 25, 2020 and March 24, 2021 under section 10A for which CIRP cannot be initiated. The tribunal relied on the Supreme Court judgment in Ramesh Kymal versus Siemens Gamesa Renewable Power Private Limited for the purpose of section10A of the IBC.

The Tribunal concluded that:

“In view of the aforesaid discussion, the amount of 25 invoices, amounting to Rs. 37,99,639/- fall within the excluded period under Section 10A of the IBC besides interest part can't be included in the total claim. Accordingly, the remaining amount of default is below the threshold limit of Rs.1 Crore”.

Conclusion

The NCLT concluded that the Karvy Stock Broking Ltd. does not fall within the definition of corporate person for the purpose of initiating CIRP as it is a financial service provider therefore a petition under section 9 of the IBC cannot be maintained. The NCLT rejected the petition also on the ground that the amount claimed did not meet the threshold limit and a substantial amount fell within section 10A period.

Case Title: Kapston Facilities Management Ltd.v.Karvy Stock Broking Ltd.

Court: National Company Law Tribunal, Hyderabad

Case Reference: CP (IB) No.332/9/HDB/2021