NCLAT: Financial Service Provider Having Asset Value of Rs.500 crore or More can only Proceed for Insolvency and Liquidation

NCLAT: Financial Service Provider Having Asset Value of Rs.500 crore or More can only Proceed for Insolvency and Liquidation

The National Company Law Appellate Tribunal (NCLAT), New Delhi, by its division bench of Justice Ashok Bhushan (Chairperson) and Barun Mitra (Technical Member) observed, Financial Service Providers can be brought under the insolvency code for the purpose of their insolvency and liquidation if the Central Government deems fit after consultation with the financial sector regulator. It held, Notification dated 18th November 2019 issued by the Ministry of Corporate Affairs (MCA), is within the exercise of power under Section 227 of the Insolvency and Bankruptcy Code, 2016 (IBC) by which Financial Service Providers have been brought into the insolvency and liquidation proceedings.

The bench was hearing three Appeals filed by the appellant- Shapoorji Pallonji Finance Pvt. Ltd. against the respondent- Rekha Singh against same order dated 22nd February, 2022 passed by the Adjudicating Authority (National Company Law Tribunal), Jaipur Bench.

An agreement was executed between one Jumbo Finvest (India) Ltd. ("JFIL," Financial Service Provider) and the Appellant (Non-Banking Finance Company) under which a facility was provided by the Appellant. The facility agreement provided for security. The Respondents thereafter issued a deed of personal guarantee in favour of the Appellant. JFIL delayed repayments of the amount disbursed to it. A recall notice was sent to Respondents along with JFIL by the Appellant demanding payment.

The Respondents contended that the application under Section 95 of the IBC was not maintainable against the personal guarantors. NCLT concurred with the view of the Respondents and dismissed the petitions.

The Appellant argued that the NCLT did not pursued the last balance sheet of JFIL in the right manner and hence it concluded that JFIL was not covered under the definition of a Corporate Person. It was contended that since the total assets of JFIL were more than Rs. 500 crore, the Section 95 application would be maintainable against the personal guarantors.

Per contra, the Respondent argued that the NCLT could not have adjudicated on the Section 95 application as the asset size of JFIL was reduced from Rs. 500 to Rs. 407 crore and hence, the NCLT lost its jurisdiction to adjudicate.

The main issue that came for consideration before the bench was whether the Section 95 Application was maintainable against the Personal Guarantors.

The bench remarked that Section 3(7) defines 'Corporate Persons' exhaustively and specifically excludes financial service providers. A conjoint reading of Section 3(7) and 3(8) shows that any financial service provider cannot be a Corporate Debtor. However, Section 227 dealing with Power of Central Government to notify financial service providers starts with non-obstante clause "Notwithstanding anything to the contrary contained in this Code".

"Section 227 has been given overriding effect to the provisions contained in the Code itself for a purpose and object. Thus, Financial Service Providers can be brought under the insolvency code for the purpose of their insolvency and liquidation if the Central Government deems fit after consultation with the financial sector regulator," opined the NCLAT.

The Tribunal further noted that a notification was issued by the MCA dated 18th November, 2019 in this regard vide which Financial Service Providers have been brought under the IBC. However, the notification puts a threshold which is an asset size of Rs. 500 crores or more.

The Tribunal asserted that the current law on this matter is that a financial service provider having assets worth Rs. 500 crore or more can only proceed for insolvency and liquidations.

Next the Tribunal examined as to whether "Jumbo Finvest (India) Ltd. (JFIL)" is a Financial Service Provider against which insolvency can be proceeded with under the Notification dated 18th November, 2019 which is the question which has been considered by the Adjudicating Authority in the impugned order.

The Tribunal noticed that in the Balance Sheet as on 31st March, 2020 under the heading 'Assets' both 'non-current assets' and 'current assets' have been included. Word 'asset size' indicated that what is meant is total assets. When total assets are investigated, as are given under heading 'Assets', the amount comes to more than Rs.600 Crores in the Balance Sheet as on 31st March, 2020. Thus, the Court opined that the Adjudicating Authority had committed an apparent error in only considering the loan receivables.

The bench held, "a Financial Service Provider admittedly have loan receivables but what is meant by asset size in Notification dated 18th November, 2019 cannot be confined to loan receivables. We, thus, are of the view that the Adjudicating Authority committed error in applying the Notification dated 18th November, 2019 by taking the figure of only loan receivables as referred to in Note 17 but has ignored the details of the Assets as given in the Balance Sheet as on 31st March, 2020, as extracted above. The Adjudicating Authority incorrectly came to the conclusion that JFIL cannot be included in the definition of 'Corporate Person' so as to become Principal Borrower. On the above premise, the Adjudicating Authority jumped to the conclusion that application filed under Section 95 against the Personal Guarantor(s) is not maintainable since the JFIL cannot be treated to be Corporate Debtor."

Next the Tribunal, noted the submission of the Respondent that in view of the fact that in the next Balance Sheet as on 31st March, 2021 the asset size of the JFIL i.e. became Rs.407 crore, the Adjudicating Authority who might have jurisdiction initially to pass order lost its jurisdiction and there was no jurisdiction in the Adjudicating Authority on 22nd February, 2022, when it passed the order to hold that JFIL can be Corporate Debtor.

In this regard, the Bench opined that in the case of statutory precondition for the exercise of jurisdiction, the pre-condition must be fulfilled before the jurisdiction is exercised by the tribunal. The Bench observed that if the contention of the Respondent is accepted that if asset size is reducing during the pendency, the Tribunal loses jurisdiction then the same would be contrary to the objective of IBC which is speedy disposal. Therefore, the said contention was rejected.

The bench asserted that the Tribunal would have jurisdiction that is exercised on the date when an application can be filed against the financial service provider for insolvency.

Next question was as to whether the Section 95 application which was filed by the Financial Creditor against the Personal Guarantor was maintainable or not.

The NCLAT opined, "we having held that on the date when application was filed under Section 95 by the Financial Creditor against the Personal Guarantor an application could have filed against the Financial Service Provider on the basis of last Balance Sheet which had asset size of more than Rs.500 crore, the application filed by the Financial Creditor against the Personal Guarantor was fully maintainable."

In view of the abovementioned reasons, the order of NCLT was set aside and accordingly all the appeals were allowed.