NCLT Hyderabad Holds Section 7 IBC Petition Not Maintainable Against Financial Service Provider
- REEDLAW
- Aug 22
- 4 min read
REEDLAW Legal News Network reports: In a crucial ruling, the National Company Law Tribunal (NCLT), Hyderabad Bench, held that an application under Section 7 of the Insolvency and Bankruptcy Code, 2016, is not maintainable against a SEBI-registered stock broking entity. The Tribunal clarified that such an entity qualifies as a Financial Service Provider under Sections 3(16) and 3(17) of the Code, which are expressly excluded from the ambit of insolvency proceedings under the IBC.
The National Company Law Tribunal (NCLT), Hyderabad Bench, comprising Mr. Rajeev Bhardwaj (Judicial Member) and Mr. Sanjay Puri (Technical Member), adjudicated an interlocutory application in a company petition and held that a SEBI-registered stock broking company falls within the statutory definition of a Financial Service Provider as per Sections 3(16) and 3(17) of the IBC. Consequently, the Bench observed that no insolvency proceedings under Section 7 can be initiated against such an entity, as Financial Service Providers remain outside the scope of the Code unless notified otherwise by the Central Government.
The petition had been filed by the Petitioner/Financial Creditor under Section 7 of the Insolvency and Bankruptcy Code, 2016, seeking initiation of the Corporate Insolvency Resolution Process (CIRP) against the Respondent/Corporate Debtor. The petition arose out of a default on redemption of Commercial Papers (CPs) subscribed by the applicant for ₹5 crore on 12.06.2019, which matured on 10.12.2019. Despite repeated demands and set-off adjustments, the respondent failed to discharge its liability, which stood at ₹4,02,84,104/- comprising principal and interest. The respondent had admitted its liability through emails dated 14.04.2020 and 06.10.2020, citing Covid-19 restrictions as the reason for non-payment.
The respondent opposed the petition on multiple grounds, primarily arguing that it was a Financial Service Provider within the meaning of Section 3(17) of the IBC and, therefore, excluded from the definition of “corporate person” under Section 3(7). It relied on SEBI registration as a stock broker and cited the NCLAT decision in Union of India v. Infrastructure Leasing and Financial Services Limited and Others, REEDLAW 2025 NCLAT Del 01617 to contend that such entities fall outside the purview of IBC. It further argued that the applicant had failed to discharge the burden of proof and had filed the petition with an intent to recover debt, contrary to the object of the IBC. The respondent also contended that the petition was defective for non-compliance with Sections 7(2) and 7(3) of the IBC, as the applicant had not produced a record of default from an Information Utility, and relied on the Supreme Court’s decision in Vidarbha Industries Power Limited v. Axis Bank Limited, REEDLAW 2022 SC 07529 to argue that admission of the petition was discretionary.
The applicant, in its rejoinder, denied that the respondent qualified as a Financial Service Provider, arguing that stock broking does not constitute rendering financial services as contemplated under Section 3(16) of the IBC. It asserted that SEBI had cancelled the respondent’s registration on 31.05.2023 and that the NSE and BSE had expelled the respondent in 2020. The applicant maintained that the petition was for insolvency resolution and not for recovery, and that proof of debt and default was established through documentary evidence, making the absence of an Information Utility record immaterial in terms of law laid down in M. Suresh Kumar Reddy v. Canara Bank and Others (2), REEDLAW 2023 SC 05587.
The Tribunal noted that the respondent had raised short-term borrowings through CPs and had defaulted on redemption on 10.12.2019. It found that debt and default were clearly established. However, the crucial issue was whether the respondent qualified as a Financial Service Provider. Upon examining Sections 3(16) and 3(17) of the IBC and relying on the NCLAT judgment in Nitin Pannalal Shah v. Vipul H. Raja and Others, REEDLAW 2023 NCLAT Del 09513, the Bench held that a stock broking entity falls within the ambit of “financial service provider” as its core function involves dealing with securities, a financial product under the Code, under SEBI authorization. Therefore, the respondent did not fall within the definition of a “corporate person” under Section 3(7) of the IBC, rendering the petition not maintainable.
The Tribunal rejected the respondent’s argument on Section 10A, holding that the initial default occurred on 10.12.2019, prior to the 10A bar period. It further clarified that the absence of an Information Utility record did not affect maintainability, as sufficient evidence of debt and default was placed on record. The reliance on Vidarbha Industries Power Limited v. Axis Bank Limited, REEDLAW 2022 SC 07529 was found misplaced, as no exceptional circumstances or proof of financial health were demonstrated by the respondent. Nonetheless, since the respondent was a Financial Service Provider, the petition under Section 7 was not maintainable under the IBC and was accordingly dismissed.
Ms.Mummaneni Vazra Laxmi and Mr. V.V.S.N. Raju, Advocates, represented the Applicant.
Mr. Avinesh Desai, Sr. Advocate and Mr. Nethan Reddy Mallu, Advocate, appeared for the Respondent.
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