NCLT Hyderabad Rules Chit Fund Companies Fall Outside CIRP, Dismisses Section 7 Plea as Not Maintainable

NCLT Hyderabad Rules Chit Fund Companies Fall Outside CIRP, Dismisses Section 7 Plea as Not Maintainable

Introduction

The National Company Law Tribunal, Hyderabad Bench, has held that chit fund companies qualify as “financial service providers” under the Insolvency and Bankruptcy Code, 2016, and therefore cannot be proceeded against as corporate debtors under the ordinary corporate insolvency framework. On this reasoning, the Tribunal dismissed the Section 7 petition filed by Siply Services Private Limited against IBG Echits India Private Limited as not maintainable.

Factual Background

The applicant sought initiation of insolvency proceedings in respect of an alleged default of approximately ₹9.52 crore. The debt arose from an inter-corporate loan agreement under which the applicant had disbursed ₹7.5 crore to the respondent company. According to the applicant, repayments ceased after 3 June 2023, despite repeated notices and demands.

The applicant further relied upon a letter dated 14 November 2023, in which the respondent allegedly acknowledged the outstanding dues and sought restructuring of the repayment terms. On this basis, it was argued that the existence of financial debt and default stood clearly established. The respondent opposed the petition at the threshold on the ground of maintainability, contending that it is a registered chit fund company engaged in accepting subscriptions, managing pooled funds, and disbursing chit amounts, all of which constitute regulated financial services.

Procedural Background

The matter came before the Hyderabad Bench comprising Judicial Member Rajeev Bhardwaj and Technical Member Sanjay Puri on a petition filed under Section 7 of the IBC seeking commencement of the Corporate Insolvency Resolution Process (CIRP).

The primary objection raised by the respondent related not to the debt itself, but to whether a chit fund entity can at all be subjected to CIRP under the Code.

Issues

1. Whether a chit fund company falls within the definition of a “financial service provider” under Section 3(17) of the IBC.

2. Whether such an entity can be treated as a “corporate person” under Section 3(7) for the purpose of CIRP.

3. Whether a Section 7 insolvency petition is maintainable against a chit fund company.

Contentions of Parties

The applicant contended that the respondent had defaulted on repayment of the inter-corporate loan and that the acknowledgment letter clearly demonstrated subsisting liability. It was submitted that the ingredients of financial debt and default were fully satisfied, warranting admission of the petition.

The respondent argued that it is engaged in the business of chit funds, which necessarily involves collection of subscriptions, maintenance of pooled funds, and periodic disbursement to subscribers. These activities, it was argued, amount to financial services rendered under the regulatory supervision of the Registrar of Chits. Therefore, the respondent submitted that it is excluded from the definition of “corporate person,” and proceedings under Section 7 are legally barred.

Reasoning and Analysis

The Tribunal accepted the respondent’s objection and held that the core nature of chit fund business is the provision of financial services. It noted that chit fund operations involve handling pooled deposits, administering subscriber contributions, and making regulated disbursements, all of which fall squarely within the meaning of financial services under the IBC.

A significant factor in the Tribunal’s reasoning was that chit fund companies function under the supervision of the Registrar of Chits, a statutory regulator. Since the IBC excludes financial service providers from the scope of “corporate persons,” the Tribunal held that such entities cannot ordinarily be subjected to CIRP by private creditors.

The Bench clarified that proceedings against financial service providers may be initiated only through the appropriate regulator in accordance with the 2019 Rules, and not by way of a creditor-driven Section 7 application. Thus, irrespective of whether debt and default existed, the petition was found to be fundamentally not maintainable in law.

Decision

The NCLT Hyderabad dismissed the Section 7 petition as not maintainable, holding that a chit fund company is a financial service provider and therefore falls outside the ambit of the ordinary CIRP mechanism under the Insolvency and Bankruptcy Code.

In this case the appellant was represented by Advocate Subrahmanya Bhanu. Meanwhile the respondent was represented by Advocate Rahul Dev.