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TMI Blog2024 (9) TMI 323X X X X Extracts X X X X X X X X Extracts X X X X ..... creation of debt and in turn default in paying that debt (debt and default). From these facts, a conclusion is drawn that applicant beyond doubt was a financial service provider on the dates when cause of actions arose for filing this application, and therefore is barred for filing section 10 application. It is found that (1) the Corporate Debtor s Certificate of Registration had been cancelled in view of its failure to achieve NOF and CRA and not because of change of its activity (2) Reserve Bank of India has categorically clarified that the Company will continue to be governed by the relevant provisions of the Reserve Bank of India Act, 1954 and various directions/ instructions issued by Reserve Bank of India from time to time even after cancellation of Certificate of Registration and (3) RBI had directed the applicant for disposal of financial assets and bring them below 50% within a period of three years from the date of cancellation of COR. It is found that beyond doubt the petitioner was FSP as on the date of credit facilities sanctioned by the financial creditors and also on the date of default by petitioner and even as on date also its activities continue to be the same and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (erstwhile State of Andhra Pradesh), which had adversely affected the business operations of the Company. 2.3 In order to meet the repayment obligations, the outstanding loans of the Applicant from the commercial banks and financial institutions were restructured in September 2011 under Corporate Debt Restructuring (CDR) by entering into Master Restructuring Agreement dated 24.09.2011 by and between the Petitioner, Small Industries Development Bank of India (SIDBI) and 26 other lenders of the Corporate Debtor. Under CDR, around 30% of the Company s debt amounting to Rs. 350 crores were converted into Optionally Convertible Cumulative Redeemable Preference Shares (OCCRPS) redeemable over a period of seven years at a coupon rate of 12% p.a. The balance debt amounting to Rs. 802.20 crores were structured to be repaid over a period of seven years including one year moratorium with an interest @ 12% p.a. payable from April 30th 2012. The Deed of hypothecation dated 24.09.2011 and other ancillary documents have been filed as Annexure-5 (page 109 to 559) to the Petition. 2.4 Despite making efforts, the Applicant failed in servicing the debt of its creditors as there were no recoveries fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncials for the next three years to monitor if the Corporate Applicant is carrying out NBFC activity unauthorisedly without COR from the Bank or otherwise. 3.2.2 According to RBI, it has no role in the CIRP against the Corporate Applicant as it does not fall in the ambit of financial service provider as defined in Section 3(17) of IBC w.e.f. 22.02.2019. 3.2.2 As per Rule/Notification issued by Central Government dated 18.11.2019, RBI is the appropriate Regulator for NBFCs (which include housing finance companies) with asset size of Rs. 500 crores or more. However, the same is not applicable to the Corporate Debtor as it is no longer an NBFC registered with RBI, which fact has been admitted by the Corporate Applicant in IA (IB) No. 554/2022. As such the Corporate Applicant is neither a financial service provider nor RBI is the appropriate Financial Sector Regulator . 3.2.3 Thus submitting, sought deletion of RBI from the array of party/Respondent as according to Respondent, the RBI is neither a necessary nor a proper party in the instant petition. 4. Out of total 24 financial creditors of the Corporate Debtor, only five financial creditors i.e. SIDBI, PNB, SBI, Kotak Mahindra Bank an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 25,00,00,000/- sanctioned to the Corporate Applicant and despite the implementation of the CDR package, the Corporate Debtor was not in a position to service its debt, the account of the Corporate Debtor was classified as NPA. The Corporate Debtor had acknowledged its debt vide letter dated 20.01.2017. When the Corporate Applicant failed to make payment of the dues, the Indian Bank had filed OA No.223 of 2020 before DRT, Hyderabad for recovery of the dues and the same is pending. 4.3 Punjab National Bank has filed counter stating that the Corporate Applicant has admitted the fact that there is a loan to the tune of Rs. 15.05 crores as on 07.01.2022 that is due and payable by the Corporate Applicant and that the Petitioner failed to follow the due procedure of filing of status report after it failed to implement the Scheme of Arrangement approved by the Hon ble High Court. It is further submitted that in case the Tribunal orders for CIRP, the Corporate Applicant would bear the CIRP costs and PNB should not be burdened with additional costs as it has been facing losses on account of credit facilities sanctioned to the Petitioner. 4.4 Small Industries Development Bank of India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FC is covered under RBI Rules and cannot invoke the provisions of IBC and only the appropriate Regulator i.e. RBI can seek initiation of CIRP against the Petitioner under the Code. Thus submitting, prayed for dismissing the present petition. 5. The Petitioner herein rebutted to the objections raised by Punjab National Bank (PNB) and SIDBI by way of similar rejoinders, inter-alia, reiterating/contending as under:- 5.1 In response to the contentions of PNB SIDBI that the Petitioner is a NBFC, the Corporate Applicant denied the same and submitted that it ceased to carry on the business of Non-banking Financial Institution pursuant to cancellation of NBFC Registration by the Reserve Bank of India vide letter dated 14.03.2019 and further the Petitioner has been instructed by the RBI vide letter dated 03.04.2019, to pass a specific Board Resolution not to carry on the business of a Non-Banking Finance Institution. It is further contended that barring lending to few mutually aided cooperative societies for maintaining connectivity with borrowers with intent to recover the outstanding, the Petitioner has not undertaken any business. 5.2 In response to the next contention that the Petition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditors and thus, stands excluded from Corporate Person as defined in Section 3(7) of IBC, 2016 If so, whether the present application for the Corporate Insolvency Resolution Process of the applicant is maintainable? 9. Before we proceed to decide the point, we usefully to refer hereunder to Section 3(7), Section 3(17) and Section 227 of IBC, 2016 which are extracted below. Section 3(7) corporate person means a company as defined in clause (20) of section 2 of the Companies Act, 2013 (18 of 2013), a limited liability partnership, as defined in clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008 (6 of 2009), 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. Section 3(17) financial service provider means a person engaged in the business of providing financial services in terms of authorisation issued or registration granted by a financial sector regulator; Section 227 Power of Central Government to notify financial sector providers etc.- Notwithstanding anything to the contrary 1 [contained in this Code] or any other law for the time being in forc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovider in terms of Section 3 (17) of the Code and that CIRP cannot be initiated against the Financial Service Provider. 13. The learned counsels for the financial creditors contend that RBI is one of the financial sector regulator in terms of Sub-Section 18 of Section 3 of IBC. It is further contended that until the Petitioner does not dispose its financial assets and brings it below 50% of the total assets, the status of the Petitioner would continue to be a NBFC-MFL and governed by RBI Act and the Cancellation of Registration by RBI would not mean to infer that it ceases to be MFI altogether. The balance sheet of the Company as on 31.03.2021 reveals that the asset size of the Corporate Applicant was Rs.400.08 crores which constitute the loans and advances (financial assets) of Rs.398.69 crores as against the asset size of the Company in the preceding financial year which stood at Rs. 783.33 crores, with financial assets being Rs.780.41 crores. The counsel for Kotak Bank submitted that instead of recovering the loans as per the condition imposed by RBI the Corporate Applicant has written off the loan and advances only with the sole intention to bring the financial assets below the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the only short issue which remains for our consideration now is whether the petitioner ceases to be a financial service provider after Cancellation of Registration (COR) by RBI with direction to dispose of the financial assets and bring it below 50% of the total assets within three years from the date of cancellation of COR so that petitioner can come out from the Principal Business Criteria (PBC) stipulated for NBFCs. 16. On perusal of the documents , we find that applicant was having a valid NBFC license and thus was a financial service provider, on the date of lending by financial creditors as well as on the date of default by the applicant. These two dates are very important as cause of actions for filing this application arose on these two dates i.e creation of debt and in turn default in paying that debt ( debt and default) . From these facts, we draw a conclusion that applicant beyond doubt was a financial service provider on the dates when cause of actions arose for filing this application, and therefore is barred for filing section 10 application. 17. Further, we have perused letter No.DNBS (H) CMS No./ 1586/00.00.468/ 2018-19 dated 03.04.2019 addressed by General Manage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts financial assets and bring them below 50% within a period of three years from the date of cancellation of COR, must have been that the petitioner will recover the amount lent to the borrowers and in turn will pay that amount to Financial Creditor or use it for reducing the accumulated losses. But we observe that petitioner has not done disposal of financial assets which can be done either through recovery from borrowers or by selling off these assets on some discounted value to asset reconstruction companies/ banks etc. On the contrary, the applicant wrote off these assets from the books by passing simple entries in the books of account and thus, brought it down to 50% of the total assets. Thus, the above act of the applicant can not be treated as compliance to the direction given by RBI in its letter of cancellation of COR. 21. Finally , on analyzing all the facts as discussed above , we find that beyond doubt the petitioner was FSP as on the date of credit facilities sanctioned by the financial creditors and also on the date of default by petitioner and even as on date also its activities continue to be the same and still it is regulated by RBI . Further, we observe that COR i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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