In September this year, the NCLAT disposed of these matters by quashing the orders of the NCLT benches.
The NCLAT’s judgment examined the definition of a ‘corporate debtor’ as per Section 3(8) of the IBC. According to this definition, a ‘corporate debtor’ must meet two criteria: firstly, being a ‘corporate person’, and secondly, defaulting on a debt owed to any person. Crucially, it observed that, the definition of a ‘corporate person’ as per Section 3(7) expressly excludes ‘financial service providers’. This exclusion is evident from the specific wording that reads, “… shall not include any financial service provider”. Basis this, the NCLAT observed that this exclusion renders ‘financial service providers,’ such as stock brokers, ineligible to be categorized as ‘corporate persons’.
The NCLAT held that stock brokers are ‘financial service providers’ on a comprehensive reading of the provisions of Section 3(17) in conjunction with Sections 3(15) and 3(16) of the IBC. These sections encompass entities engaged in various financial services, including buying, selling, and dealing in securities and derivative products. It also observed that stock brokers operate under the regulatory oversight of the SEBI, which is recognized as a ‘financial sector regulator’ under Section 3(18) of the IBC, reinforcing their finding regarding the classification of stock brokers as ‘financial service providers’.
It also placed authoritative reliance on several leading judgments which, in the context of other financial service providers, had upheld their exclusion of ‘financial service providers’ from the IBC. The Bench also noted with affirmation the Report of the Sub-Committee of the Insolvency Law Committee for Notification of Financial Service Providers under Section 227 of the IBC, dated 4 October 2019 which clarified that stock brokers are ‘financial service providers’ under the IBC and also recommended that the IBC, in its present form, ought not apply to stock brokers.
This judgment also clarifies that the only way a ‘financial service provider’ can be covered under the IBC is by way of a notification under Section 227 of the IBC by the Central Government (in consultation with the appropriate financial sector regulators). Only one such notification has been issued till date, but that too is limited and extends the applicability of the IBC only to a specific class of ‘financial service providers’ i.e., “Non-banking finance companies (which include housing finance companies) with asset size of Rs.500 crore or more, as per last audited balance sheet.”.
The judgment also affirmatively acknowledges the locus of stock exchanges as a market regulator. It notes that, in accordance with the applicable Bye Laws and the relevant SEBI circulars, a clear process unfolds when a member of a stock exchange is declared a defaulter and subsequently expelled. In such cases, the assets of the defaulting member automatically transfer to the exchange, which, in turn, calls for claims from all parties involved and utilizes these assets to settle outstanding claims. The procedures outlined within the stock exchanges’ Bye Laws, coupled with the relevant SEBI circulars, provide a comprehensive framework for addressing grievances and facilitating the resolution of disputes. This framework effectively serves as a self-contained mechanism for handling claims and disputes that may arise between a client and a trading member, while also upholding the stock exchange’s bounden duty to protect the interest of investors. It was argued that allowing the initiation of IBC proceedings against stock brokers, who are explicitly excluded from its purview, would have a detrimental impact and undermine the established mechanism. The judgment is an affirmation that with the admission of stock brokers into CIRP and the coming into force of the moratorium, the interest of investors may be prejudiced rendering them incapable of realizing their rightful claims against a trading member who has been declared a defaulter.
By looking at the manner in which stock brokers are registered and regulated as well as the the nature of their business, the NCLAT came to the unequivocal conclusion that stock brokers “clearly fall within the definition of ‘Financial Service Provider’”. It observed that “Legislature was well aware of the intricate nature of the financial services and have purposely kept Financial Service Providers out of the procedure prescribed under the Code with exception of Notification on Financial Service Provider under Section 227 by the Central Government.” It finally held and ordered that:
“…we are of the considered opinion that both the Corporate Debtors, i.e. Simandhar Broking Ltd. and M/s. Astitva Capital Market Private Limited being registered Broker with SEBI and Trading Member of the NSE are providing services, which are ‘financial services’ within the meaning of definition of Section 3(16) of the Code and by virtue of Section 3(7) read with Section 3(8) and Section 227 of the Code, Section 7 Application filed by Corporate Debtors were not maintainable. The orders passed by Adjudicating Authority in both the Appeal(s) deserve to be set-aside.”
Source: Barandbench
