Company Entitled To Acquire Properties Dehors Cancellation Of Its Registration As NBFC: Kerala High Court

The Kerala High Court recently ruled that even when an entity is stripped of its NBFC license, it continues to operate as a company and a legal person as long as its Certificate of Registration is not cancelled under the Companies Act.

Justice Bechu Kurian Thomas thus ruled that such a company, despite cancellation of its registration as an NBFC, is entitled to buy, own and hold properties and continue its legal existence.

Allowing the plea of one such company, whose registration as NBFC was cancelled, the Bench observed,

"Cancellation of registration as an NBFC, midway during the securitisation proceedings, will not result in the entity losing the opportunity to continue the proceedings under the SARFAESI Act to recover amounts due to it. I am fortified in my conclusion by virtue of the fact that due to the cancellation of CoR, the petitioner is refrained only from acting as an NBFC, any further, for the purpose of collecting deposits from the public." 

The question before the Court was whether the cancellation of registration as an NBFC will render the petitioner disabled to execute a sale deed.

The Single Bench decided:

"When the petitioner's existence as a company is not in dispute, it is entitled to acquire properties and continue its legal existence. Merely because the CoR to function as an NBFC is cancelled, that will not deprive the petitioner of its legal character as a company. Petitioner's existence as a legal entity capable of holding properties remains unscathed, in spite of the cancellation of its registration as an NBFC." 

Background:

The petitioner was a Non-Banking Financial Company (NBFC) engaged in the business of advancing loans and advances.

Accordingly, they had advanced a loan towards two persons over immovable property. Upon default in payment, it became an NPA account and SARFAESI proceedings against the said account were initiated.

Meanwhile, RBI cancelled the petitioner's NBFC registration citing its failure to achieve the required net owned fund within the stipulated time. 

While so, the petitioner purchased the NPA property in the public auction since there was no other buyer. Subsequently, a sale certificate was also issued.

When the petitioner went for mutation, the Village Authorities refused to effect mutation stating that the petitioner's registration under Section 45-IA(6) of the RBI Act was cancelled and that the sale deed executed after such date was without authority. Aggrieved by this decision, the petitioner company moved the Court. 

Relevant Findings: 

The Court examined Section 45-IA(6) of the Act which provides for cancellation of a Certificate of Registration (CoR).

Once the CoR is cancelled under the provisions of Section 45-IA(6) of the Act, the NBFC is not entitled to function as an NBFC thereby disabling it to accept deposits from the public or carry on any other function in the nature of banking activities as contemplated under the Act.

"Certificate of registration as an NBFC is different from the certificate of registration as a company," the Court observed at the outset.

It added:

"Registration as a Company and registration as an NBFC are under different and distinct statutes. A company registered under the Companies Act, is a legal entity by itself. The existence of a  company is determined by the registration under the Companies Act, while registration as an NBFC determines different type of activities, such a registered company can indulge in."

The Court held that the petitioner's registration as a private limited company under the Companies Act has not been cancelled under any known provisions of law.

"When the petitioner's existence as a company is not in dispute, it is entitled to acquire properties and continue its legal existence. Merely because the CoR to function as an NBFC is cancelled, that will not deprive the petitioner of its legal character as a company."

Hence, it was found that the petitioner's existence as a legal entity capable of holding properties remains unscathed, in spite of the cancellation of its registration as an NBFC. 

In the said circumstances, it was found that the petitioner is entitled to buy, hold and own properties dehors its cancellation of certificate of registration as an NBFC, and the petition was accordingly allowed.

Advocates Raghul Sudheesh and Glaxon K.J represented the petitioners in the matter while Government Pleader Sabeena P. Ismail appeared for the respondents. 

Case Title: M/s Sree Sankara Funds (P) Ltd. v. Tahsildar (Land) & Ors

Click Here To Read/Download The Order