NCLT Hyderabad Declares Stock Brokers As Financial Service Provider, Petition Under Section 9 Not Maintainable

The National Company Law Tribunal Hyderabad Bench, comprising Shri Rajeev Bhardwaj (Judicial Member) and Shri Sanjay Puri (Technical Member) dismissed insolvency petition filed against Karvy Stock Broking Ltd. (Corporate Debtor/Respondent) by Kapston Facilities Management Ltd. (Operational Creditor) under section 9 of the Insolvency and Bankruptcy Code (IBC). The NCLT held that the respondent is a financial service provider against whom no Corporate Insolvency Resolution Process (CIRP) can be initiated. Brief Facts M/s. Karvy Stock Broking is a registered company under the provisions of the Companies Act, 1956 and provides stock broking and research advisory services in India. The corporate debtor entered into an agreement with the operational creditor on April 20, 2011 wherein the operational creditor undertook to provide Security and Housekeeping services at offices of the corporate debtor and its group of companies. The operational creditor served a demand notice on June28, 2021 asking for the payment due to the tune of Rs. 1,07,63,333 from the corporate debtor. The first default in making the payment occurred on October 1, 2019 for the invoices raised on July 31, 2019 and August 31, 2019. Thereafter this default continued. Operational debt fell due on the expiry of 30 days from the issuance of each invoice. Contention of Both Parties It was submitted by the respondent that the petition is not maintainable as it is a financial service provider and not a corporate person as defined under section 3(7) of the IBC. The respondent is registered stock broker with the SEBI and stockbrokers fall within the ambit of financial services provider under section 3(17) of the IBC. It was further contended that since the respondent does not fall within the definition of the corporate debtor, CIRP cannot be initiated against it by the operational creditor under section 9 of the IBC. It was next submitted that the total amount claimed by the operational creditor did not cross the threshold limit as provided under section 4 of the IBC because in the petition interest has also been claimed for which the respondent never agreed to pay. If the interest claimed is excluded, the principal amount falls below the threshold limit rendering the petition not maintainable. Per Contra, it was argued by the operational creditor that the SEBI order did not exempt the respondent from insolvency proceedings initiated against it at the time of filing the petition. It was further submitted that the respondent was liable to pay interest on the principal amount under MSME Act. Since the operational creditor is registered under the MSME, as per section 16 and 17 of this act it is entitled to claim interest at three times the bank rate for the delayed payment as notified by the Reserve Bank of India (RBI). It was contended by the operational creditor that the claim for interest was valid rendering them eligible to file petition under section 9 of the IBC as the amount claimed crossed the threshold limit. NCLT's Analysis The NCLT observed that financial service providers do not fall within the definition of corporate person as defined under section 3 (7) of the IBC therefore the CIRP cannot be initiated against them under section 9 of the IBC by the operational creditor. The Tribunal relied on the judgment of Globe Capital Market Ltd. vs. Narayan Securities Ltd. delivered by the NCLAT wherein this principle was established. The Tribunal held as under: “However, the financial service provider is not included in the definition of corporate person and accordingly an application cannot be filed for initiation of CIRP against the financial service provider. Here, we may also profitably refer to the decision of Hon'ble NCLAT in Globe Capital Market Ltd. vs. Narayan Securities Ltd. Company Appeal (AT) (Insolvency) No.32 of 2024 & I.A No. 62 of 2024”. It was further noted by the NCLT that since the respondent is registered with National Stock Exchange, Bombay Stock Exchange and SEBI, its services are a financial product under section 3(15) of the IBC therefore it is deemed to be a financial services provider under section 3(16) (e) of the IBC. The Tribunal stated as under: “The Respondent is a stockbroker and was also a member registered with National Stock Exchange of India Ltd, BSE Ltd and SEBI. For its stock broking activities. Stock broking is a 'financial product' as defined under Section 3(15) of IBC and therefore the Respondent is deemed to be a financial service provider under Section 3(16)(e)”. The NCLT rejected the contention of the operational creditor that the respondent was not providing financial services at the time of filing the petition because it had been prohibited by the SEBI order dated November 11, 2019 from accepting new clients for its stockbroking activities. The tribunal held that the respondent was merely prohibited from stockbroking...

NCLT Hyderabad Declares Stock Brokers As Financial Service Provider, Petition Under Section 9 Not Maintainable

Mohd Malik Chauhan

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NCLT Hyderabad Declares Stock Brokers As Financial Service Provider, Petition Under Section 9 Not Maintainable

Mohd Malik Chauhan

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INR 1099+GST

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