2023 (9) TMI 527 - AT - Insolvency and Bankruptcy

Initiation of CIRP - Dues towards stock exchange - Financial debts / Financial Service Provider - Validity of order of NCLT admitting the application of the Ex-Directors of the Corporate Debtors, for default in repayment of Loan - Prayer for clarification that a Trading Member of the Applicant registered as a Stock Broker with the SEBI being a Financial Service Provider is not a corporate person and is not amenable to proceedings under the Code - Corporate Debtor is a Stock Broker, registered with the SEBI and is a Trading Member of the NSE - corporate person or not - HELD THAT - The SEBI is Financial Sector Regulator. The Stock Brokers and Sub- Brokers under the SEBI (Stock-Brokers and Sub-Brokers) Regulations, 1992 are required to be compulsorily registered under Section 3. Regulation contains details of obligation and responsibilities of the Stock Brokers. Schedule-II Regulation, 1992 provides for Code of Conduct for Stock Brokers . The Stock Brokers under heading B Duty to the Investor includes Investment Advice in publicly accessible media. The Stock Brokers, who are covered by the Regulation 1992 are subject to various obligation and duties towards Investors and from the nature of activities as contained in the Memorandum of Association of both the Corporate Debtors, they clearly fall within the definition of Financial Service Provider . It is noticed that SEBI and NSE have a mechanism for disposal of complaints by Investor - The NSE has also brought on record the Circulars issued by Securities and Exchange Board of India dated November 6, 2020 on the subject Investor Grievance Redressal Mechanism, which indicates that SEBI has its own mechanism for redressal of grievances, which arose regarding service-related complaint. In fact, a complaint was filed by Vipul H Raja against the Corporate Debtor as noted above for the very same amount, which was considered and rejected by complaint mechanism. The Financial Creditor Respondent No.1 without being deterred by the said rejection has filed Section 7 Application, which was wholly incompatible. Section 5(8)(g) has to be read harmoniously with Section 7 and Section 5(7) and 5(8). Section 5(8)(g) cannot be read in any manner that financial service providers are also covered under Section 5(8)(g). The Adjudicating Authority misconstrued the provisions of the Code and on finding that debt is payable by the Corporate Debtor, admitted Section 7 Application. The order of the Adjudicating Authority against the Corporate Debtor namely - Simandhar Broking Ltd., who being the Financial Service Provider was an entity against whom no proceedings under Section 7 could have been initiated. Initiation of Section 7 proceedings was itself nonmaintainable and Adjudicating Authority ought to have rejected the Application. Both the Corporate Debtors, i.e. Simandhar Broking Ltd. and M/s. Astitva Capital Market Private Limited being registered Broker with SEBI and Trading Member of the NSE are providing services, which are financial services within the meaning of definition of Section 3(16) of the Code and by virtue of Section 3(7) read with Section 3(8) and Section 227 of the Code, Section 7 Application filed by Corporate Debtors were not maintainable. The orders passed by Adjudicating Authority in both the Appeal(s) deserve to be set-aside. Appeal allowed.

Summary

Issues Involved:
1. Maintainability of Section 7 Application under the Insolvency and Bankruptcy Code (IBC) against Financial Service Providers.
2. Nature of functions performed by the Corporate Debtors.
3. Jurisdiction and locus standi of National Stock Exchange (NSE) in filing the appeal.

Issue-Wise Summary:

1. Maintainability of Section 7 Application under the Insolvency and Bankruptcy Code (IBC) against Financial Service Providers:
The core issue in both appeals was whether the Corporate Debtors, being Financial Service Providers, were amenable to proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016. The Tribunal held that Financial Service Providers are expressly excluded from the definition of 'corporate person' under Section 3(7) of the Code, which means they are not Corporate Debtors against whom Section 7 applications can be initiated. The Tribunal emphasized that the Central Government, under Section 227, has the power to notify Financial Service Providers for insolvency proceedings, but only non-banking finance companies with assets of Rs. 500 crores or more have been notified so far. Therefore, the Section 7 applications against the Corporate Debtors, who were Stock Brokers and registered with SEBI, were not maintainable.

2. Nature of functions performed by the Corporate Debtors:
The Tribunal examined the nature of functions performed by the Corporate Debtors, Simandhar Broking Ltd. and Astitva Capital Market Pvt. Ltd. Both entities were engaged in stock broking and trading, regulated by SEBI, and thus fell under the definition of Financial Service Providers as per Section 3(16) of the Code. The Tribunal noted that their services included buying, selling, or subscribing to financial products and were covered under the inclusive definition of 'financial service'. The Memorandum of Association of both Corporate Debtors confirmed their roles as Financial Service Providers, further substantiating their exclusion from the definition of 'corporate person'.

3. Jurisdiction and locus standi of National Stock Exchange (NSE) in filing the appeal:
The Tribunal considered the locus standi of NSE in filing the appeals. NSE, being a Market Regulator with whom the Corporate Debtors were registered, had sufficient locus to challenge the orders of the Adjudicating Authority. The Tribunal found that the proceedings initiated by the erstwhile directors of the Corporate Debtors were intended to stall regulatory actions by NSE and were not genuinely aimed at insolvency resolution. The Tribunal also noted that NSE has its own grievance redressal mechanism for investor complaints, which had already rejected the claims made by the Financial Creditors in these cases.

Conclusion:
The Tribunal concluded that both Corporate Debtors, being Financial Service Providers registered with SEBI and Trading Members of NSE, were not 'corporate persons' under the IBC and hence, Section 7 applications against them were not maintainable. The orders admitting the Section 7 applications were set aside, and the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtors was closed. The Resolution Professionals (RPs) were discharged, and it was directed that they could apply for their fees and expenses. The intervention application by Smt. Prem Kumari was also addressed, allowing her to proceed with her suit for possession in the Commercial Court.