Stock Broker Company Is A Financial Service Provider Under IBC: NCLT Delhi

The National Company Law Tribunal (“NCLT”), New Delhi Bench, comprising of Shri Ashok Kumar Bhardwaj (Judicial Member) and Shri L.N. Gupta (Technical Member), while adjudicating a petition in M/s Bezel Stockbrokers Private Limited v Security Exchange Board of India & Anr., has held that a stock broker company is a financial service provider under IBC. “Since Corporate Applicant, being a stock broker, was dealing in the activities of buying, selling, or dealing in securities etc., which in terms of Section 3(15) of IBC 2016 are a “Financial Product” belonging to another person. Hence, in terms of Section 3(16) of IBC 2016, the Corporate Applicant was providing “Financial Service” or in other words, it was a “Financial Service Provider”.” The insolvency resolution process under IBC can only be initiated against a ‘Corporate Person’, which excludes a Financial Service Provider. Accordingly, the Bench has dismissed a petition filed by a stock broker company under Section 10 of IBC, seeking initiation of Corporate Insolvency Resolution Process (CIRP) against itself. Background Facts M/s Bezel Stockbrokers Pvt. Ltd. (“Company”) filed an application under Section 10 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), seeking initiation of Corporate Insolvency Resolution Process (“CIRP”) against it. The Company is a stock broker registered with the Securities and Exchange Board of India (“SEBI”), under the SEBI Act read with SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992. The Company contended that it was undergoing a financial crisis and could no longer continue operations. Further, the Company has been declared a defaulter and expelled from the National Stock Exchange membership. SEBI opposed the petition while contending that Company is a Financial Service Provider under IBC and not a 'Corporate Person' in terms of Section 3(7) of IBC. Therefore, the Corporate Applicant is ineligible to seek initiation of CIRP against itself. Issue Whether a Stock Broker Company is a Financial Service Provider? NCLT Verdict The Bench observed that under Sections 7, 9 and 10 of IBC, CIRP can only be initiated against a Corporate Debtor. Section 3(8) of IBC defines a ‘Corporate Debtor’ as “a corporate person who owes a debt to any person”. The definition of ‘Corporate person’ given under Section 3(7) of IBC excludes “any financial service provider”. Therefore, if the Company is found to be a ‘financial service provider’ then no CIRP can be initiated against it, as it is neither a Corporate Person and nor a Corporate Debtor under IBC. Since the Company is a stock broker, the Bench opined that it must first find out if a stock broker company can be categorized as a financial service provider. The Section 3(17) of IBC defines ‘financial service provider’ as “a person engaged in the business of providing financial services in terms of authorisation issued or registration granted by a financial sector regulator”. In terms of Section 3(18), ‘financial sector regulator’ means “an authority or body constituted under any law for the time being in force to regulate services or transactions of financial sector” and it expressly includes the Securities and Exchange Board of India (“SEBI”). Further, Section 3(16) of IBC which defines ‘Financial Service’ includes the services with respect to Financial Products. Ultimately, Section 3(15) of IBC defines Financial Product to mean securities, contracts of insurance, deposits et al., thus it can be concluded that securities are a financial product. The Bench observed that Shares, Scrips, Stocks, Bonds, Debentures, Debenture Stocks etc., are included under the term “Securities”. The Company has itself admitted in the petition that it was carrying on business as a “stock broker/proprietary trading member/clearing member for carrying on the activities of buying, selling, or dealing in securities/clearing and settlement of trades”. Hence, the same can be treated as a “Financial Product”. The Bench concluded that the Company, which is a stock broker, is a Financial Service Provider in terms of Section 3(16) of IBC, as it provides financial service by dealing in financial products such as securities. “Since Corporate Applicant, being a stock broker, was dealing in the activities of buying, selling, or dealing in securities etc., which in terms of Section 3(15) of IBC 2016 are a “Financial Product” belonging to another person. Hence, in terms of Section 3(16) of IBC 2016, the Corporate Applicant was providing “Financial Service” or in other words, it was a “Financial Service Provider”.” Moreover, SEBI is a Financial Sector Regulator and the registration of the Company with SEBI shows that it is a Financial Service Provider. It was held that a stock broker company is a Financial Service Provider under IBC. The Bench noted that it is a settled position that CIRP can...

Stock Broker Company Is A Financial Service Provider Under IBC: NCLT Delhi

Pallavi Mishra

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