Section 7 IBC Application against an NBFC not maintainable, rules NCLAT 

The NCLAT, Principal Bench, New Delhi noted that Section 3(7) of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) explicitly states that financial service providers are not included in the definition of a corporate person. Further, to become a corporate debtor, an entity has to be a corporate person, but the financial service provider does not qualify as a corporate person. 

It was noted that the proceedings against Sungrowth have been initiated because Sungrowth is a corporate guarantor as defined under Section 5A of the IBC. 

The Tribunal opined that Sungrowth has registration as a financial service provider and therefore it cannot be called a banking institution. It is a non-banking financial institution and therefore, an application under Section 7 cannot be held to be maintainable. 

Brief Facts: 

One M/s Adhunik Alloys & Power Ltd. was undergoing CIRP, and a resolution plan was submitted which was approved by the NCLT. In the same proceedings, the State Bank of India (Respondent) submitted a claim which was considered in the resolution plan, but now an Application filed under Section 7 of the IBC has been filed against the Sungrowth Share and Stocks Ltd. who is a Guarantor, for recovery of the balance outstanding of the Corporate Debtor M/s Adhunik Alloys & Power Ltd. 

The present appeal is preferred against the said admission of the Application by the NCLT. 

Contentions of the Appellant: 

It was contended that the application under Section 7 was not maintainable. Since Sungrowth is. Anon-banking financial institution and was registered by the Reserve Bank of India, NCLT did not have the jurisdiction to initiate the proceedings. It was argued that on the day on which the application under Section 7 was filed, the registration of Sungrowth as NBFC was in operation, and hence the application was not maintainable. 

Contentions of the Respondent: 

It was argued that the Appellant was not doing financial services and hence, the registration of the Appellant was cancelled. 

Observations of the Tribunal: 

It was noted that Section 3(7) of the IBC explicitly states that financial service providers are not included in the definition of a corporate person. Further, to become a corporate debtor, an entity has to be a corporate person, but the financial service provider does not qualify as a corporate person. 

It was noted that the proceedings against Sungrowth have been initiated on the grounds that Sungrowth is a corporate guarantor as defined under Section 5A of the IBC. 

The tribunal opined that Sungrowth has registration as a financial service provider and therefore it cannot be called a banking institution. It is a non-banking financial institution and therefore, an application under Section 7 cannot be held to be maintainable. 

The decision of the Tribunal: 

Based on the abovementioned reasons, the Appellate Tribunal allowed the appeal and set aside the order of the NCLT. 

Case Title: Nirmal Kumar Agarwal v. State Bank of India & Ors. 

Coram: Justice Rakesh Kumar Jain, Mr. Kanthi Narahari (Technical Member)

Case No.: Company Appeal (ATA) (Ins.) No. 983 of 2019 

Advocates for Appellant: Advs. Mr. Anup Kumar, Ms. Shruti Singh, Ms. Neha Jaiswal

Advocates for Respondent: Advs. Mr. Vaijayant Paliwal, Mr. Nikhil Mathur

Read Order @LatestLaws.com