Introduction

The case of Nirmal Kumar Agarwal v. State Bank of India & Others was adjudicated by the National Company Law Appellate Tribunal (NCLAT), Principal Bench in New Delhi on December 19, 2022. This appeal challenges the order dated September 4, 2019, wherein the State Bank of India (SBI) filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) against Sungrowth Share and Stocks Limited, a Non-Banking Financial Company (NBFC) acting as a corporate guarantor for the financial obligations of Adhunik Alloys & Power Limited, the corporate debtor.

The core issue revolves around the jurisdictional authority of the Adjudicating Authority to initiate insolvency proceedings against a corporate guarantor that operates as an NBFC, particularly in light of the statutory definitions and regulatory frameworks governing such entities.

Summary of the Judgment

The appellant, Nirmal Kumar Agarwal, contended that the application filed by SBI under Section 7 of the IBC was not maintainable. The argument was premised on the fact that Sungrowth Share and Stocks Limited was an NBFC registered under the Reserve Bank of India (RBI) Act, 1934, and thus excluded from the definition of a "corporate person" under Section 3(7) of the IBC. Consequently, the Adjudicating Authority lacked jurisdiction to initiate insolvency proceedings against Sungrowth.

The tribunal, after thorough examination, agreed with the appellant’s stance. It held that since Sungrowth was a registered NBFC, it did not qualify as a "corporate person" eligible under Section 7 of the IBC. The cancellation of Sungrowth's registration on July 9, 2018, further reinforced the tribunal's decision that the proceedings initiated by SBI were non-existent due to the lack of jurisdiction.

The appellate division set aside the impugned order, thereby dismissing SBI's application and underscoring the importance of adhering to statutory definitions and jurisdictional boundaries in insolvency proceedings.

Analysis

Precedents Cited

The judgment references two pivotal decisions from the NCLAT:

• Randhiraj Thakur vs. Jindal Saxena Financial Services Pvt. Ltd., 2018 SCC Online NCLAT 508
• Housing Development Finance Corporation Ltd. Vs. RHC Holding Pvt. Ltd., 2019 SCC Online NCLAT 398

In Randhiraj Thakur, the tribunal addressed the applicability of the IBC to financial service providers, emphasizing the need for clear statutory provisions or rules to govern insolvency proceedings against such entities. Similarly, in Housing Development Finance Corporation Ltd., the scope of financial services under Section 3(16) was interpreted broadly, confirming that the definition encompasses a wide range of financial activities.

These precedents influenced the current judgment by reinforcing the principle that financial service providers, specifically NBFCs regulated by the RBI, are not encompassed within the definition of "corporate person" under Section 3(7) of the IBC, thereby excluding them from proceedings under Section 7 unless specific provisions or rules are enacted.

Legal Reasoning

The tribunal's legal reasoning was anchored in the statutory definitions provided within the IBC, particularly focusing on Section 3(7) and Section 3(17), which distinguish between "corporate persons" and "financial service providers." Since Sungrowth Share and Stocks Limited was registered as an NBFC—a "financial service provider" under Section 3(17)—it was explicitly excluded from the category of "corporate persons" under Section 3(7). Therefore, initiating insolvency proceedings against Sungrowth under Section 7 was procedurally incorrect.

Additionally, the tribunal examined the timing of the application by SBI. Although Sungrowth's registration was active on June 8, 2018, when the application was filed, its subsequent cancellation on July 9, 2018, meant that Sungrowth did not meet the criteria of a "corporate debtor" at the time the proceedings were effectively underway. This cancellation reinforced the lack of jurisdiction of the Adjudicating Authority to entertain the application.

The tribunal also cited Supreme Court decisions such as Jagmittar Sain Bhagat Vs. Health Services, Haryana and Kiran Singh Vs. Chaman Paswan, which establish that any decree passed without jurisdiction is null and void. These principles were pivotal in affirming that the proceedings initiated against Sungrowth were inherently flawed due to jurisdictional overreach.

Impact

This judgment clarifies the boundaries of Section 7 of the IBC, particularly in relation to financial service providers like NBFCs acting as corporate guarantors. It underscores the necessity for Adjudicating Authorities to adhere strictly to statutory definitions and reinforces the exclusion of financial service providers from certain insolvency proceedings unless explicitly included through legislative amendments or specific rules.

For future cases, this judgment serves as a precedent, guiding creditors on the applicability of the IBC to financial institutions and emphasizing the importance of verifying the status of entities before initiating insolvency proceedings. It also signals to regulatory bodies the need for clear guidelines or amendments if insolvency proceedings against financial service providers are to be contemplated.

Complex Concepts Simplified

Section 3(7) and Corporate Persons

Section 3(7) of the IBC defines a "corporate person" as entities like companies or limited liability partnerships but explicitly excludes "financial service providers." This distinction is crucial because it determines the entities against which insolvency proceedings can be initiated under various sections of the IBC.

Non-Banking Financial Companies (NBFCs)

NBFCs are financial institutions that offer various banking services without holding a banking license. They are regulated by the RBI under the RBI Act, 1934. Unlike banks, NBFCs do not hold a franchise for taking public deposits, though some can accept deposits from members of their Rs. 5 lakh Depository.

Section 7 of the Insolvency and Bankruptcy Code, 2016

Section 7 deals with the initiation of the Corporate Insolvency Resolution Process (CIRP) by financial creditors for the default of a company in repayment of debt. However, this section is applicable only to "corporate persons" and excludes financial service providers unless specified otherwise.

Jurisdictional Authority

Jurisdiction refers to the legal authority of a court or tribunal to hear and decide a case. In this context, the Adjudicating Authority's jurisdiction is determined by whether the entity against which insolvency proceedings are initiated falls within the scope of applicable sections of the IBC.

Conclusion

The judgment in Nirmal Kumar Agarwal v. State Bank of India & Others serves as a pivotal clarification on the applicability of Section 7 of the Insolvency and Bankruptcy Code, 2016. By affirming that financial service providers such as NBFCs are excluded from the definition of "corporate persons," the NCLAT has reinforced the importance of adhering to statutory definitions and jurisdictional boundaries in insolvency proceedings.

This decision not only provides clarity for creditors and financial institutions regarding the procedural aspects of initiating insolvency but also underscores the necessity for potential legislative or regulatory amendments to encompass financial service providers if deemed necessary. As insolvency laws continue to evolve, such judgments play a critical role in shaping the legal landscape, ensuring that proceedings are conducted within the ambit of clear and defined legal parameters.