NCLAT Holds Section 7 IBC Not Maintainable Against NBFC Without Proof of Financial Services, Sets Aside Admission and Remands to NCLT
- REEDLAW
- Aug 19
- 4 min read
REEDLAW Legal News Network reports: In a significant ruling, the National Company Law Appellate Tribunal (NCLAT) clarified that proceedings under Section 7 of the Insolvency and Bankruptcy Code (IBC) are not maintainable against a Non-Banking Financial Company (NBFC) merely on the basis of its registration. The Appellate Tribunal held that liability under the IBC arises only upon establishing that the NBFC was actually engaged in financial services, thereby setting aside the admission order and remanding the matter to the NCLT for a fresh determination.
The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, comprising Justice Rakesh Kumar Jain (Judicial Member) and Mr. Ajai Das Mehrotra (Technical Member), adjudicated a Company Appeal and categorically held that a registered NBFC cannot automatically be subjected to proceedings under Section 7 of the IBC. The Tribunal emphasised that such liability would depend on demonstrating that the NBFC was engaged in financial services within the meaning of the Code. Accordingly, the Appellate Tribunal set aside the admission order and remanded the case to the NCLT for determination on this foundational aspect.
The appeal was directed against the order dated 5 July 2023 by which the application filed under Section 7 of the Insolvency and Bankruptcy Code against the Appellant was admitted. Initially, this Tribunal granted an interim stay on the admission order on 18 July 2023, noting the submission that the Appellant was a Non-Banking Financial Company (NBFC) and hence outside the purview of Section 7 proceedings. However, by order dated 25 January 2024, the appeal was dismissed on the ground that the Appellant failed to establish that it was a registered NBFC with the Reserve Bank of India (RBI). The dismissal was based on information obtained by the Respondent under the Right to Information Act, wherein the RBI had categorically stated that the Appellant was not a registered NBFC.
Subsequently, the Appellant moved an application for recall of the dismissal order, submitting that pursuant to orders of the Delhi High Court, the RBI had handed over the certificate of registration dated 11 February 2003 confirming its NBFC status. Upon seeking clarification from the RBI, this Tribunal was informed on 29 November 2024 that the Appellant was indeed a registered NBFC under Section 45-IA of the RBI Act, 1934. The RBI also confirmed the inclusion of the Appellant in its updated list of registered NBFCs. Consequently, the dismissal order dated 25 January 2024 was recalled, and the appeal was restored to its original number along with the interim protection earlier granted.
During the final hearing, it was argued that the Section 7 application could not have been maintained against the Appellant since it was a financial service provider regulated by the RBI. The Respondent countered that under Section 3(17) of the Code, the Appellant was required to prove, through cogent evidence, that it was engaged in the business of providing financial services pursuant to its NBFC registration. Since this issue had not been examined by the Adjudicating Authority at the stage of admission, the Appellate Tribunal held that the matter required reconsideration.
Accordingly, the impugned order admitting the Section 7 application was set aside, and the case was remanded back to the NCLT for fresh consideration. The NCLT was directed to provide both parties with an opportunity to lead evidence on whether the Appellant, as an NBFC, was engaged in providing financial services so as to fall outside the ambit of proceedings under Section 7 of the Code. It was clarified that the Appellate Tribunal had not adjudicated on the merits of the case, and all issues were left open for determination by the Adjudicating Authority. The parties were directed to appear before the NCLT on 28 March 2025.
Mr. Prakhar Mithal, Ms. Isha Virmani and Mr. Gaurav Raj, Advocates, represented the Appellant.
Mr. Bheem Sain Jain, Advocate, appeared for the Respondent No. 1.
Ms. Khushboo Sharma, Ms. Nimita Kaul and Ms. S. Sinha, Advocates, appeared for the Respondent No. 2/RP.
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