India: Non Applicability Of IBC - Financial Service Provider Outside IBC's Purview

IN THE NATIONAL COMPANY LAW APPELLATE TRIBUNAL [NCLAT]

Randhiraj Thakur, Director, Mayfair Capital Private Ltd vs. Jindal Saxena Financial Services and Mayfair Capital Private Ltd.

Company Appeal (AT) (Insolvency) Nos. 32 & 50 of 2018

(Arising out of order in C.A. No. 233(PB)/2017 IN C.P. No. (IB)-84(PB)/2017)

Decided On: 18.09.2018

FACTS

An 'Inter Corporate Deposit Agreement' was reached between 'M/s. Jindal Saxena Financial Services Private Limited' (1st Respondent) (hereinafter referred to as 'Jindal') and 'M/s. Mayfair Capital Pvt. Ltd.' (2nd Respondent) (hereinafter referred to as 'Mayfair') which is a Non-Banking Financial Company [NBFC].

Mayfair had undertaken 'financial services' by accepting deposits from Jindal, i.e. the 1st Respondent.

The NCLT on being satisfied of an existence of default in debt, vide an order dated 27.06.2017, had admitted an application preferred by Jindal (Financial Creditor) under Section 7 of the Insolvency and Bankruptcy Code, 2016.

Consequently, Mayfair had approached the NCLAT challenging the order passed on 27.06.2017.

ISSUE BEFORE NCLAT

Whether provisions of IBC would be applicable on 'M/s. Mayfair Capital Pvt. Ltd.' in spite of it being a 'Financial Service Provider'.

OBSERVATION

The NCLAT referred to Sections 3(16), 3(17) and 3(18), where the definitions of Financial Service, Financial Service Provider and Financial Service Regulator as hereunder:

Section 3 - In this Code, unless the context otherwise requires,—

xxx xxx xxx

(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—

(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;"

xxx xxx

(17) "financial service provider" means a person engaged in the business of providing financial services in terms of authorisation issued or registration granted by a financial sector regulator;

xxx xxx

(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;"

xxx xxx xxx

Further, reference was made by the Tribunal to the factual submissions in the case that:

A certificate of registration was granted to Mayfair on 16th March, 2012 under Section 45-IA of the Reserve Bank of India Act, 1934.

As per the Memorandum of Association of Mayfair the main object, inter-alia, includes:

"......carrying on the business of an investment company to carry on all types of financial operations and all types of financial services including housing finance, consumer finance and industrial finance etc."

CONCLUDING VIEW

The NCLAT set aside the impugned order dated 8th January, 2018 passed by the Adjudicating Authority, and allowed the appeal while holding that:

• All other orders passed by the Adjudicating Authority pursuant to the impugned order and action taken by the Resolution Professional, including the advertisement published in the newspaper calling for applications, all such orders and actions are declared illegal and were set aside.
• Order passed by the Adjudicating Authority for appointment of Interim Resolution Professional, declaration of moratorium and freezing of account, was set aside.
• The application preferred by the 1st Respondent under Section 7 of I&B Code was also dismissed.

REASON OF JURISPRUDENCE

The Appellate Tribunal reasoned that the impugned order is fit to be set aside as:

'...the appellant was not a party before the Adjudicating Authority and the order was passed without notice to 'M/s. Mayfair Capital Pvt. Ltd.'

Further, the NCLAT has observed that on the basis of the entire scheme of I&B Code:

"......It will be [is] evident that the Code is to consolidate and amend the laws relating to reorganisation and insolvency resolution of 'corporate persons', 'partnership firms' and 'individual' in a time bound manner. It is a self-contained Code which is exhaustive in nature when it comes to reorganisation and insolvency resolution."

NCLAT has further observed that:

"......However, an exception had been carved out while enacting the Code that the 'financial service providers' have been kept outside the purview of the Code. Being a consolidating legislation only those acts are permitted which are mentioned in the Code and it cannot be made applicable to 'financial service providers' including 'non-banking financial institutions' and MFI's banks, which have been kept outside the purview of the Code.

The Adjudicating Authority has failed to notice the aforesaid provisions and passed the impugned order dated 8th January, 2018 initiating 'insolvency corporate resolution process' against 'M/s. Mayfair Capital Pvt. Ltd.', a 'financial service provider'."

AMLEGALS REMARKS

This case sets out a precedent that there is a generic exemption for NBFCs from being a 'debtor' under the Code.

It is not very probable that a different jurisprudence would be evolved by the Supreme Court which decides applicability/non-applicability of IBC on NBFCs, however, at this juncture, the intention and decision of NCLAT seems to be adhering to the scheme of the code.

This content is purely an academic analysis under "Legal intelligence series".

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