2021 (4) TMI 1148 - Tri - Insolvency and Bankruptcy

Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Financial Service Providers or not - existence of debt and dispute or not - HELD THAT - There is a thin line of difference with regard to the provisions of Section 3(16)(e) of the Code and with regard to the business activities of the Respondent. Section 3(16)(e) of the Code, envisages that the term Financial Services shall include rendering or agreeing, for consideration, to render advice on or soliciting for the purposes of (i) buying, selling, or subscribing to, a financial product; (ii) availing a financial service; or (iii) exercising any right associated with financial product or financial service whereas the Respondent being engaged/involved in Stock Broking business is directly dealing in the shares, securities, derivatives, etc. on behalf of its clients including the Applicant rather than only rendering advice or soliciting or agreeing in that regard. Hence, it can be said that the Respondent is covered under the purview of the Corporate Debtor and cannot be considered as the Financial Service Provider since it is directly dealing with the financial products and not only rendering advice or soliciting or agreeing in that regard. The amount of debt payable by the Respondent - Corporate Debtor is more than the statutory limit prescribed under the provisions of the section 4 of the Insolvency and Bankruptcy Code, 2016 as on the date of filing of the application i.e. 22.07.2019 - The Applicant has furnished the copy of Written Communication of the Proposed Interim Resolution Professional - CA Prakash Udhawdas Tekwani in Form - 2 in terms of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. From the material placed on record by the Applicant, this Adjudicating Authority is satisfied that the application is complete in all respects and the Corporate Debtor has committed default in paying the dues to the Applicant - Petition admitted - moratorium declared.

Issues Involved:
1. Whether the applicant qualifies as a financial creditor under the Insolvency and Bankruptcy Code, 2016.
2. Whether the respondent, being a stock broking company, qualifies as a Financial Service Provider (FSP) and is thus excluded from the definition of a Corporate Debtor.
3. Whether the debt claimed by the applicant is due and in default.
4. Whether the petition meets the requirements for admission under Section 7 of the Insolvency and Bankruptcy Code, 2016.

Detailed Analysis:

1. Qualification of Applicant as Financial Creditor:
The applicant filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016, seeking reliefs under Section 7(5)(a) and Section 13(1)(a)(b)(c) of the Code. The applicant provided finance and security margin to the respondent since 26.12.2017, amounting to ?1,01,74,984.56 by way of actual payments and ?2,58,93,350 by way of shares and securities. The applicant furnished copies of bank statements and ledgers to support the claim of unpaid debt by the corporate debtor. The respondent contended that the applicant does not fall under the definition of a financial creditor as defined under Section 5(7) of the Code, arguing that the applicant was merely a client of the respondent company for stock trading.

2. Qualification of Respondent as Financial Service Provider (FSP):
The respondent argued that it is a Financial Service Provider (FSP) within the meaning of Section 3(17) of the Code, being registered with SEBI as a stockbroker, and thus does not fall under the definition of Corporate Person under Section 3(7) of the Code. The respondent relied on various judgments to support this claim. However, the tribunal observed a thin line of difference between the provisions of Section 3(16)(e) and the business activities of the respondent. The tribunal concluded that the respondent, being directly involved in buying, selling, or subscribing to financial products for and on behalf of the applicant, does not qualify as an FSP but falls under the definition of a Corporate Debtor.

3. Debt Due and Default:
The tribunal found that the applicant had provided finance and security margin to the respondent, and the respondent had not shown any documents regarding the filing of any suit/legal proceedings for the recovery of the claimed amount. The applicant furnished multiple ledgers and bank statements to show that the debt had not been paid and that the corporate debtor was unable to pay its debts. The tribunal observed discrepancies and illegalities in the ledgers and invoices issued by the respondent, indicating manipulation to avoid liability. The tribunal concluded that the debt is due and there is a default on the part of the corporate debtor.

4. Requirements for Admission under Section 7:
The tribunal noted that the amount of debt payable by the respondent is more than the statutory limit prescribed under Section 4 of the Code. The applicant furnished the copy of Written Communication of the Proposed Interim Resolution Professional in Form-2. The tribunal concluded that the application is complete in all respects and the corporate debtor has committed default in paying the dues to the applicant. The tribunal was satisfied that the requirements of Section 7 of the Code were fulfilled, and thus, the petition deserved to be admitted.

Conclusion:
The petition was admitted, and a moratorium was declared prohibiting the institution or continuation of suits or proceedings against the corporate debtor, transferring or disposing of assets, and recovery of property by an owner or lessor. The tribunal appointed an Interim Resolution Professional to act under Section 13(1)(b) of the Code. The order of moratorium shall continue until the completion of the corporate insolvency resolution process or until the tribunal approves a resolution plan or passes an order for liquidation.

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