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Financial Service Providers having asset size less than Rs. 500 crores cannot be a Corporate Debtors under IBC

In SHAPOORJI PALLONJI FINANCE PRIVATE LIMITED vs REKHA SINGH, three separate  applications was filed before NCLT Jaipur by the Applicant as Financial Creditor under under Section 60 & 95 of IBC read with Rule 7(2) of Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtor) Rules, 2019 to initiate insolvency resolution process against Rekha Singh,  Ajay Kumar Singh and Siddharth Singh (hereinafter referred to as the Personal Guarantors / Applicants). 

Background

According to the Applicant, the Personal Guarantors had through a personal guarantee secured repayment of a term loan of Rs. 25,00,00,000/- advanced by the petitioner to Jumbo Finvest (India) Limited, an NBFC , under facility agreement dated 27.03.2018. However, the Debtor had failed to make payment of interest amounts for the months of September 2020 & October & October 2020 and also failed to repay the principal amount instalment for the quarter ending in September 2020.

In reply, the Personal Guarantors filed application under Section 60(5) of the Insolvency and Bankruptcy Code ('IBC' / 'Code'),2016 read with Rule 49 of the NCLT Rules, 2016, questioning the maintainability of the application filed against them and among the various objection filed by them, they pointed out that the definition of a 'Corporate Person' as per the IBC excludes Financial Service Providers such as Jumbo Finvest (India) Limited.

Judgment

The NCLT observed that the Principal Borrower, i.e. Jumbo Finvest (India) Ltd. is a Financial Service Provider having been granted a Certificate of Registration to commence / carry on the business of Non-Banking Financial Institution without accepting public deposits, by the RBI which ordinarily would exclude it from the Insolvency proceedings as per Section 3(7) of the Code.

However, the NCLT also observed that before coming to any conclusion, it must be noted that by the powers provided to the Central Govt. under Section 227 of the Code, two notifications being vide notification G.S.R. 852(E) dated 15.11 .2019 notified the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicatory Authority) Rules, 2Ol9 (referred to as 'FSP Rules'). and Notification S.O. 4139(E) dated 18.11 .2019 (referred to as 'FSP Threshold Notification') have been introduced and as laid down in the above notifications, the expression 'Corporate Debtor' wherever they occur, shall mean "financial service provider" but subject to a threshold limit of asset size of Rs. 500 crores and above. As per the last audited balance sheet of Jumbo Finvest (India) Limited for year ending on 3 1 .03.2020, the asset size is approx. Rs. 487 crores and as per unaudited figures for the year ending 3 1 .03.2021, the total asset size of Jumbo Finvest (India) Limited is approx. Rs. 407 Crores. Therefore, Jumbo Finvest (India) Limited, is excluded. 

The NCLT also provided a flow chart as under to explain the different definitions  revolving around Corporate Debtor and Financial Creditors and their relation with the Financial Service providers :

Note

The above issue displays one of the many reasons behind the delay in the Indian legal process. Inexplicably, without changing the definition of the 'Corporate Person; which clearly excludes Financial Service Provider', as new rule was introduced to deal with the FSPs.

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