Can IBC be Invoked against a Financial Service Provider?

[Anirudh Agrawal is a fourth year student of Nalsar University of Law, Hyderabad]

Recently, a two-member bench of the National Company Law Tribunal (NCLT) in Apeejay Trust v. Aviva Life Insurance Co. India Ltd instituted insolvency proceedings against one of the leading insurance companies of the country – Aviva Life Insurance. Given the exclusion of ‘financial service providers’ from the purview of the Insolvency and Bankruptcy Code, 2016, the decision raises interesting issues with respect to the purview of ‘financial service providers’ as defined in section 3(17) of the Code. Here, the operational creditor initiated insolvency proceedings on the premise that the Aviva defaulted in making towards service tax and license fees dues. As expected, the counsel for Aviva adopted the preliminary defence that ‘Aviva’ being an insurance company was outside the purview of the Code, and sought the petition to be dismissed. It is submitted that above defence is consistent with the text of sections 3(16) and 3(17) which exclude financial service providers from the purview of the Code.

In response, the counsel for the operational creditor argued that there existed no transaction with respect to financial services between the creditor, and Aviva, and therefore qua the transaction in question, Aviva could not be held to be a ‘financial service provider’.

Interestingly, the NCLT ruled in favour of the operational creditor on the ground that the creditor did not have any claims with respect to contracts of insurance, but with respect to license fees and service tax. It followed, according to the NCLT, that Aviva could not use section 3 of the Code as a ‘blanket cover’ on the ground of it being a financial service provider.

The author submits that the decision is incorrect, for several reasons. First, the decision is inconsistent with the past decisions of the National Company Law Appellate Tribunal (NCLAT) in Randhiraj Thakur, Director, Mayfair Capital Private Ltd v. Jindal Saxena Financial Services and Mayfair Capital Private Ltd and HDFC v. RHC Holdings Private Ltd, since the NCLAT in these decisions did not carve out any exception for financial service providers to whom operational dues are owed.

Second, contracts of insurance have been explicitly covered under section 3(16)(c) of the Code. Further, Aviva was granted authorization to this effect by the Insurance Regulatory and Development Authority of India (IRDAI). Hence, a conjoint reading of section 3(17) which defines ‘financial service providers’, and section 3(16) which defines ‘financial services’ makes clear that the Aviva cannot be brought within the purview of the Code.

Third, in view of the possible consequences on the economy, as well as the detriment to the interest of the consumers attached to such enterprises, financial service providers were excluded from the purview of insolvency proceedings under the Code. Admitting Aviva to insolvency under the Code would derogate from the objectives irrespective of the nature of the debt involved.

Fourth, bringing financial service providers such as Aviva within the purview of the Code, would render section 227 of the Code redundant. Section 227 allows the Central Government to notify categories of financial providers for the purpose of conducting the insolvency and liquidation proceedings of such entities under the Code. Recently, the Central Government has notified the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019. As discussed here, the system of insolvency resolution envisaged under the Rules is distinct from the provisions applicable to corporate debtors that are not financial service providers. For instance, under the Code, any creditor with a claim of more than Rupees One Lakh can institute proceedings against the debtor, as opposed to the Rules, where  the power to do so is limited to the relevant regulator. Moreover, in contrast to section 14 of the Code, where the moratorium period commences on admission of the insolvency petition, the Rules provide for the imposition of a moratorium on the date of filing of the application.

In this context, the NCLT’s emphasis on the nature of the ‘debt’ as opposed to the nature of the ‘entity’ involved would translate into an incongruous scenario where the relevant framework for instituting insolvency proceedings against a specific financial service provider would be the general provisions of the Code where the debt is of an ‘operational nature’ but would change to the Rules, where the debt is of a financial nature. In effect, this opens up the possibility of insolvency proceedings being instituted against the same financial service provider under two distinct legal frameworks.

Anirudh Agrawal

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1 comment


    This makes for an instance (rather yet another classic circumstance) in which the dreaded concept of ‘controversy’ has come to be raised and relied on. The disturbing question that , in turn, has given to rise to, is THIS: Whether such a controversy , as has always been the case / a recurring problem,-
    a) has its genesis in the inept drafting of the legislation (IBC) and/ or
    b) is it attributable to the ‘contrarian’ thinking behind in interpreting the applicable provisions differently.

    In short the moot point of poser is, – should not the ‘IBC’-

    which, as is being commonly experienced, even within the short period of its existence has brought to surface several such controversies,

    go back to the drawing board of the bureaucrats in the North Block for a thorough revamping aiming at ‘simplification’?

    Cr Refer (don’t disconnect) to the not unrelated Post @
    but with focus on GST Code, being similarly of a recent origin !


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