NCLAT Upholds IBC Bar On Insolvency Against NBFC, Dismisses Religare’s CIRP Bid Against Strategic Credit Capital

NCLAT Upholds IBC Bar On Insolvency Against NBFC, Dismisses Religare’s CIRP Bid Against Strategic Credit Capital

Introduction

The National Company Law Appellate Tribunal (NCLAT), Delhi, has dismissed an appeal filed by Religare Finvest Limited challenging the rejection of its Section 7 application against Strategic Credit Capital Pvt Ltd. A Bench comprising Judicial Member Justice N. Seshasayee and Technical Members Arun Baroka and Indevar Pandey held that insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016 cannot be initiated against a Financial Service Provider.

Factual Background

The dispute arose from a Rs. 40 crore loan disbursed in July 2015 by Nishu Finlease Private Limited to Strategic Credit Capital Pvt. Ltd., secured by pledge of over 1.32 crore equity shares of ABG Shipyard Limited. In June 2016, the loan was assigned to Religare Finvest Limited for ₹45 crore. Following alleged default, a termination-cum-recall notice was issued on June 24, 2016. In July 2017, a comprehensive settlement agreement was executed acknowledging total dues of ₹793.67 crore, including Religare’s exposure of ₹45 crore. The agreement required procurement of ₹400 crore within nine months. No payment was made.

Religare filed its Section 7 petition in June 2019.

Procedural History

The National Company Law Tribunal Delhi Bench dismissed the Section 7 plea. Religare challenged the dismissal before the NCLAT.

Issues

1. Whether the Section 7 petition was barred by limitation.

2. Whether invocation of pledged shares extinguished the financial debt.

3. Whether a Section 7 CIRP petition is maintainable against a Financial Service Provider.

4. What is the relevant date to determine Financial Service Provider status.

Contentions

Religare argued that the petition was within limitation, particularly in light of acknowledgment in the settlement agreement. Invocation of pledge remedies did not extinguish its rights as a financial creditor.

The respondent was not a Financial Service Provider on the date of filing. The respondent contended that as a registered Non-Banking Financial Company (NBFC), it was a Financial Service Provider, and therefore insulated from CIRP under Section 7 of the Code.

Tribunal’s Observations

The Appellate Tribunal rejected the limitation objection and held that the petition was filed within time. It further observed that invocation of pledged shares did not automatically extinguish creditor rights. However, the Tribunal noted that Strategic Credit Capital Pvt. Ltd. was registered as a Non-Banking Financial Company at the time of the financial transactions. The Bench clarified that the relevant date for determining status under the Code is the date of the financial transaction, not the date of filing of the petition. It observed that, “We do not find the arguments of the appellant financial creditor to be convincing and we hold that as on the date of financial transactions the respondent was financial service provider and the Section 7 proceedings under the Code were not permissible on it and for this sole reason itself the appeal could be dismissed.” The Tribunal further remarked that once the petition itself was not maintainable, other issues became academic, though it addressed them for completeness.

Decision

Holding that a Financial Service Provider cannot be subjected to Section 7 CIRP proceedings, the NCLAT dismissed the appeal.

In this case the appellant was represented by Sumesh Dhawan, Vatsala Kak, Shaurya Shyam, Khyati Khemka, Varsha Mohanty and Sandeep D Da, Advocates.