NBFCs outside the purview of IBC

In the matter of Housing Development Finance Corp. Ltd. v. RHC Holding Pvt. Ltd., the National Company Law Appellate Tribunal (“NCLAT”) held that the Respondent Company being a non-banking financial institution rendering ‘financial service’ is out of the purview of the Insolvency and Bankruptcy Code, 2016 (“IBC”).

FACTS

Housing Development Finance Corporation Ltd (“HDFC”), being a financial creditor filed an application under Section 7 of the IBC against RHC Holding Pvt. Ltd (“RHC”). Such application was rejected by the National Company Law Tribunal (“NCLT”), Principal Bench, New Delhi by order dated December 06, 2018 on the ground that RHC being a ‘non-banking financial company’ is a ‘financial service provider’  rendering ‘financial service’ and is out of the purview of the IBC as under Section 3 (7) of the same.

HDFC went in appeal before Hon’ble National Company Law Appellant Tribunal (“NCLAT”), New Delhi (Appellate Tribunal) against the impugned order dated December 06,2018.

ISSUE

Whether a corporate debtor being a ‘non-banking financial institution’ is a ‘financial service provider’ and therefore exempt under Section 3 (7) of the IBC?

JUDGEMENT

The NCLAT ruled that an NBFC is a ‘financial service provider’ for the following reasons:

  • Firstly, because RHC had been granted a certificate of registration under the Reserve Bank of India Act, 1934 giving status of a “Non-Banking Financial Institution”. As per precedent, an application made under Section 7 of the IBC is not maintainable against a company that has been granted such a certificate of registration.
  • Secondly, because the definition of ‘financial services’ as under Section 3(16) of IBC is not limited to the nine (9) activities, as detailed in Section 3(16). The list of functions under Section 3 (16) is not exhaustive but inclusive, which means that other services not mentioned in the section can be deemed to fit within the meaning of the term, ‘financial services’. Even if the services provided by RHC are not mentioned under Section 3(16), these are still ‘financial services’ for the purpose of Section 3(16).

In light of the aforementioned reasons, The NCLAT ruled that RHC, a ‘non-banking financial institution’ is carrying on business of financial institution providing ‘financial service’ and thereby it being ‘financial service provider’, does not come within the meaning of Corporate Person/Corporate Debtor as per Section 3 (7) of the IBC. The petition was dismissed.