NCLT Mumbai Bench affirms exclusion of financial service providers from CIRP under Insolvency and Bankruptcy Code
In a recent judgment, the National Company Law Tribunal (NCLT) Mumbai Bench dismissed the application filed by Arthmetics Financial Services Private Limited against Centbank Financial Services Limited, marking a significant reinforcement of the legal framework governing financial service providers under the Insolvency and Bankruptcy Code, 2016. The application was filed under Section 9 of the Code, aiming to initiate Corporate Insolvency Resolution Process (CIRP) against Centbank Financial Services, a company registered as a debenture trustee with the Securities and Exchange Board of India (SEBI).
The Tribunal, presided over by Member (Judicial) Shri Nilesh Sharma and Member (Technical) Shri Sameer Kakar, ruled that financial service providers are explicitly excluded from the definition of "corporate person" under Section 3(7) of the Insolvency and Bankruptcy Code. This exclusion prohibits the initiation of CIRP against entities classified as financial service providers. The judgment highlights the Tribunal's commitment to uphold the statutory provisions and protect the interests of financial service providers.
The applicant, Arthmetics Financial Services, contended that Centbank Financial Services, despite being registered as a debenture trustee, derived a majority of its income from non-financial service provider activities, thus challenging its classification as a financial service provider. However, the Tribunal rejected this argument, noting that segmented or vertical-based insolvency is not recognized under the Code. The Tribunal stated that the mere proportion of income from non-FSP activities does not alter the legal status of a registered financial service provider.
Furthermore, the judgment emphasized that insolvency proceedings against financial service providers can only be initiated by the appropriate regulator. In this case, SEBI, which has not been notified under Section 227 of the Code, holds the exclusive jurisdiction to initiate such proceedings. This reinforces the protective mechanism for financial service providers, ensuring that their insolvency proceedings are managed by the sector-specific regulator.
The Tribunal's decision draws upon precedent cases, including Apeejay Trust v. Aviva Life Insurance Co. India Ltd., and Saumil A. Bhavnagri v. Nimit Builders Private Limited, which further clarify the exclusion of financial service providers from CIRP under the Code. The NCLT Mumbai Bench's ruling serves as a reminder of the stringent regulatory framework governing financial services and the limitations imposed on insolvency proceedings involving such entities.
The judgment advises Arthmetics Financial Services to explore other legal remedies available under applicable laws, as CIRP against Centbank Financial Services is non-maintainable. This decision not only reiterates the legal position but also underscores the importance of sector-specific regulation in the financial services domain.
Bottom Line:
Insolvency and Bankruptcy Code, 2016 - Application under Section 9 against a financial service provider not maintainable as financial service providers are excluded from the definition of "corporate person" under Section 3(7) of the Code.
Statutory provision(s): Section 3(7), Section 3(16), Section 3(17), Section 9, Section 227 of the Insolvency and Bankruptcy Code, 2016
