2021 (12) TMI 156 - Tri - Insolvency and Bankruptcy

Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Financial Creditors - existence of debt and dispute or not - HELD THAT - Section 3(7) of IBC 2016 reads that Corporate Person means a Company as defined in clause (20) of section 2 of the Companies Act, 2013, a limited liability partnership, as defined in clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008, or any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider. It is evident from the said Notification dated 18th November, 2019, that the said Rules shall apply to such Financial Service Providers of categories as may be notified by the Central Government under Section 227 of the IB Code, 2016 from time to time and pursuant to the exercise of power contained in Section 227 of the IB code, 2016 the Central Government has chosen to notify NBFC with the assets of ₹ 500 crore or more as per last audited balance sheet (Notification dated 18.11.2021) and it is also seen from the Rule framed by the Central Government that any one cannot initiate proceedings seeking for Corporate Insolvency Resolution Process (CIRP) of the Financial Service Provider and it is only the Regulators who have been given the power to initiate the proceedings before the Adjudicating Authority namely this Tribunal. The Corporate Debtors before this Hon ble Tribunal is a Financial Service Provider Company as per the above sections, rules etc., and we don t find any merit in the arguments of the Counsel for the FC and the submissions of the FC that the Application filed by it under Section 7 of IBC is admitted and CIRP initiated even though it has admitted that the Total Assets of the CD is ₹ 15.63 Crores only which is well below the stipulated limit amount of ₹ 500.00 crores - Applicant FC has not followed the Guidelines and filed this Application under Section 7 of IBC in respect of a Financial Service Provider without following the due process of law. Application dismissed.

Issues Involved:
1. Initiation of Corporate Insolvency Resolution Process (CIRP) under Section 7 of the Insolvency and Bankruptcy Code, 2016.
2. Jurisdiction and eligibility of the Corporate Guarantor as a Financial Service Provider.
3. Procedural compliance with the Insolvency and Bankruptcy Code and related rules.
4. Ex-parte order and its setting aside.
5. Application of specific rules for Financial Service Providers.

Detailed Analysis:

1. Initiation of CIRP under Section 7 of the Insolvency and Bankruptcy Code, 2016:
The petition was filed by the Bank of India (Financial Creditor) under Section 7 of the Insolvency and Bankruptcy Code, 2016, seeking the initiation of CIRP against AKJ Fincap Limited (Corporate Guarantor) for the defaulted amount of ?11,34,30,136.00. The Financial Creditor provided detailed documentation, including loan agreements, hypothecation agreements, and mortgage deeds, to substantiate the debt and default. The Corporate Guarantor had provided guarantees and created equitable mortgages to secure the loan.

2. Jurisdiction and Eligibility of the Corporate Guarantor as a Financial Service Provider:
The Corporate Guarantor, AKJ Fincap Limited, is a Non-Banking Financial Company (NBFC) registered with the Reserve Bank of India (RBI). The Financial Creditor admitted that the total assets of AKJ Fincap Limited were ?15.63 crores, which is below the stipulated limit of ?500 crores for NBFCs to be eligible for CIRP under the special provisions for Financial Service Providers. The Tribunal emphasized that only the appropriate regulator (RBI) can initiate CIRP against Financial Service Providers with assets of ?500 crores or more.

3. Procedural Compliance with the Insolvency and Bankruptcy Code and Related Rules:
The Tribunal noted that the application did not comply with the specific rules for Financial Service Providers as prescribed under the Insolvency and Bankruptcy Code, 2016, and the related rules notified by the Central Government. The Central Government's notification dated 18.11.2019 specifies that only NBFCs with assets of ?500 crores or more are subject to CIRP, and such proceedings must be initiated by the appropriate regulator, not by individual creditors.

4. Ex-parte Order and its Setting Aside:
An ex-parte order was initially passed by the Tribunal on 18.03.2020 due to the absence of the Corporate Guarantor. The Corporate Guarantor later filed an application to set aside the ex-parte order, citing insufficient notice and the impact of COVID-19 restrictions. The NCLAT, upon appeal, set aside the ex-parte order, emphasizing the principles of natural justice and the need to provide the Corporate Guarantor an opportunity to file a reply and participate in the proceedings.

5. Application of Specific Rules for Financial Service Providers:
The Tribunal highlighted that the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019, apply to Financial Service Providers with assets of ?500 crores or more. The Financial Creditor's application did not follow these rules, as the Corporate Guarantor's assets were below the required threshold, and the appropriate regulator (RBI) did not initiate the proceedings.

Order:
The Tribunal rejected the application filed by the Financial Creditor under Section 7 of the Insolvency and Bankruptcy Code, 2016, due to non-compliance with the specific rules for Financial Service Providers and the asset size requirement. The order clarified that the rejection does not affect the Financial Creditor's right to seek recourse before other forums if eligible.

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