Are Financial Providers Open To Insolvency ?

To appreciate the judgment, it is pertinent to reproduce the arguments made by the operational creditor before the Hon'ble Bench, the counter-argument of the corporate debtor and the ultimate finding of the Hon'ble Bench.

Argument of the alleged Corporate Debtor :

"7. Ld. Counsel for the Corporate Debtor has raised a preliminary objection regarding maintainability of the petition on the ground that they are an insurance company and therefore, they are "Financial Services Provider", the business of which is strictly regulated by the "Financial Sector Regulator" and, therefore, as per the provisions of the IBC, the present petition cannot lie against the respondents and the same deserves to be dismissed. Ld. Counsel for the Corporate Debtor has further given the example of Banks, where any such proceedings against the Banks cannot be initiated and has contended that no such proceedings are initiated against the banks also on the ground of absolute bar: Reliance in this regard has been placed upon the provision of Section 3(17) and 3(18) of the Insolvency and Bankruptcy Code, 2016. The provision of which are quoted below:"

Section 3(17): - ''financial service provider" means a person engaged in the business of providing financial services in terms of authorization issued or registration granted by a financial sector regulator;

Section 3(18): - ''financial sector regulator" means an authority or body constituted under any law for the time being in force to regulate services or transactions of financial sector and includes the Reserve Bank of India, the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority of India, the Pension Fund Regulatory Authority and such other regulatory authorities as may be notified by the Central Government;"

Argument of the Operational Creditor :

"9. Learned Counsel for the Operational Creditor has strongly opposed the arguments as raised by the Learned Counsel for the Corporate Debtor and it is contended that the arguments on behalf of the Corporate Debtor are clearly fallacious. There is no absolute bar of any kind, as contended by the Learned Counsel for the Corporate Debtor, and the bar is only operative for such institutions which are covered under financial services as defined under Section 3(16) of the IBC, 2016. For the sake of convenience and ready reference, the provisions of Section 3 (16) are quoted below: -

"Section 3(16): - "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;"

10. Further, Ld. Counsel for the Operational Creditor has argued that the Corporate Debtor has not provided any insurance cover or any financial assistance of any kind to the Operational Creditor and the defaulted dues are for the lease and the rentals and, therefore, qua the Operational Creditor, the Corporate Debtor is not a financial services provider as defined in Section 3( 17) of the Code.

Reasoning by the Hon'ble Bench :

The definition of financial service under Section 3(16) of the IB Code clearly includes the transactions effecting contract of insurance. However, the Operational Creditor does not have any claim in respect of contract of insurance. The claim is with respect to the outstanding license fees and the service tax amounts. Hence, the Corporate Debtor cannot use the provisions of Section 3 of the IB Code as a blanket cover to claim exclusion from IB Code proceedings on the ground that it is a financial service provider.

From the aforesaid, the emphasis by the Hon'ble Bench is put on the nature of the transaction entered into between the Operational Creditor and the alleged Corporate Debtor, whereas the correct position of law appears to be the nature of the Corporate Person and NOT the nature of the transaction.

It is evident from the definition of a 'Corporate Debtor' under Section 3(8) and definition of 'Corporate Person' under Section 3(7) that exclusion is of a Corporate Person i.e. the Company from the IB Code, which for convenience are reproduced below :

"3 (7) "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;

3(8) "corporate debtor" means a corporate person who owes a debt to any person;"

It is amply clear from the definition of Corporate Person and Corporate Debtor as mentioned above that any company which is a Financial Services provider does not fall within the definition of Corporate Debtor and hence is not amenable to jurisdiction under the provisions of the IB Code because of explicit exclusion of such companies from the definition of Corporate Person and eventually Corporate Debtor.

It will not be amiss to mention that in the entire judgment there is no reference to Section 3(7) and Section 3(8) either by the Operational Creditor or the alleged Corporate Debtor and the same has led to the pronouncement of an incorrect judicial order, which can now only be corrected by the National Company Law Appellate Tribunal (NCLAT).

It is also important to mention that the present Order dated 4.11.2019 also appears to be per incuriam as neither of the parties involved in the lis made a reference to the judgment of the Hon'ble NCLAT in Randhiraj Thakur, Director – Mayfair Capital Pvt. Ltd. v. Jindal Saxena Financial Services Pvt Ltd. & Others dated 18.9.2018, where it is clearly set out that the entire scheme of the IB Code clearly demonstrates that it is a self-contained & exhaustive code and that it provides an exception – whereby companies engaged in business as Financial Services Provider have been kept outside the purview of the code. Thus, the IB Code cannot be made applicable to Financial Service Providers which are either a Company or an LLP, including NBFCs, MFIs & Banks.

In the present case, the Hon'ble Bench of the National Company Law Tribunal also failed to appreciate that the alleged Corporate Debtor is engaged in services directly covered by the definition of Section 3(16)(c) and thus as an insurance company is beyond the purview of the IB Code on a cumulative reading of Section 3(8) with Section 3(7), Section 3(16) & Section 3(17) of the IB Code, 2016.

It is sincerely hoped that error in judgement will be brought to the notice of Hon'ble NCLAT and will be set right, at the earliest.

Manisha Chaudhary is the Managing Partner at UKCA and Partners. Author's views are personal

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