Stock Brokers Amounts to Financial Service Provider, Petition u/s 9 not Maintainable: NCLT

The National Company Law Tribunal Hyderabad Bench, 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. 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 Kapston Facilities Management Ltd 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 June 28, 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. Uncover Section 50C Best Practices: Expert-Led Course, Click here 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. 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. Uncover Section 50C Best Practices: Expert-Led Course, Click here It was further noted 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 held that the respondent was merely prohibited from stockbroking activities. Its certificate of registration issued by the SEBI was not either cancelled or suspended when the petition was filed therefore the plea of the operational creditor is meritless. Further observed that the date when the claimed amount became due has not been provided by the operational creditor. Additionally, as per the agreement the payment had to be made within 60 days from the issuance of an invoice. It cannot be said that the claim was continuous rather each bill had a separate cause of action. It was further held that the threshold limit for filing petition under Section 9 IBC is Rs.1 Crore as per Section 4 of IBC. If the interest component is excluded from the total claim, the claimed amount will be below statutory limit. The Tribunal comprising Shri Rajeev Bhardwaj (Judicial Member) and Shri Sanjay Puri (Technical Member) concluded that the amount of 25 invoices, amounting to Rs. 37,99,639/- fall within the excluded period under Section 10A of the IBC besides interest part can't be included in the total claim. Accordingly, the remaining amount of default is below the threshold limit of Rs.1 Crore. Uncover Section 50C Best Practices: Expert-Led Course, Click here The NCLT rejected the petition also on the ground that the amount claimed did not meet the threshold limit and a substantial amount fell within section 10A period. Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates