Nitin Pannalal Shah vs Vipul H Raja & ors
CA (AT) (Ins) 379 of 2021
Facts:
1.Corporate Debtor – Simandhar Broking Ltd. Is a Broking Company involved in the business of Stock Broking and is a Registered Stock Broker with Securities and Exchange Board of India (“SEBI”) and is a Trading Member with National Stock Exchange of India Limited (“NSE”).
2.Vipul H Raja opened a trading account with the Corporate Debtor and an agreement dated 21.12.2017 was entered with the Corporate Debtor for Cash Segment and Future Options Segment trading. With effect from 01.01.2018, Respondent No.1 started trading with the Corporate Debtor. Respondent No.1 incurred huge losses particularly in the stock of Jaypee Associates Ltd. and carry forward his position for months, against the carry forward charges and interest. Due to the default and inability to pay the outstanding dues of the Corporate Debtor, Respondent No.1-Corporate Debtor sold the margin provided by Respondent No.1.
3.Respondent No.1 filed a complaint against the Corporate Debtor before Investor Grievance Resolution Panel (“IGRP”) and claimed inter-alia “the non-issuance of document, nonreceipt of funds and securities and unauthorized trade claiming an amount of’ Rs.1,01,74,985/- and several securities”.
4.Respondent No.1 also filed an Application under Section 7 of the Code, raising the same claim. The IGRP on 16.08.2019 rejected the claim of Respondent No.1 and held that no claim is due towards Respondent No.1 by the Corporate Debtor. AA by an order dated 06.04.2021 admitted Section 7 Application, holding that Applicant has established the financial debt and there is default on the part of the Corporate Debtor.
5.Appellant has filed the appeal challenging the decision.
Issue: Whether the order passed by is correct in law ?
Arguments:
Appellant:
1.Appellant contention is that the Corporate Debtor is a Stock Broker, registered with the SEBI and is a Trading Member of the NSE and Section 7 Application against the Corporate Debtor was not maintainable, since the Corporate Debtor is not a ‘corporate person’ within the meaning of the Code.
2.Counsel submitted that the Corporate Debtor in both the Appeal(s) is not a ‘corporate person’ within the meaning of Section 3(7) of the Code, which specifically exclude any Financial Service Provider. When the Financial Service Provider is not a ‘corporate person’ within the meaning of the Code, no Application under Section 7 can be filed against a ‘corporate person’ and the same is not maintainable.
3.Counsel submitted that AA without adverting to the relevant provisions of the Code, proceeded to admit Section 7 Application against the Corporate Debtors, who are Stock Brokers registered under the SEBI Act, 1992 and are Trading Member of the NSE. The learned Counsel for the Appellant(s) have referred to the Memorandum of Association of the Corporate Debtor, i.e., Simandhar Broking Ltd. as well as Astitva Capital Market Private Limited, which indicate that they are Financial Service Provider.
Respondent:
1.Counsel submitted that Application filed under Section 7 was very well maintainable. It was submitted that Section 3(7) read with Section 3(16)(e) of the Code seeks to create a narrow exception for entities who are engaged in rendering or agreeing to render advice or soliciting for the financial products or services., which cannot be extended to entities, which are directly engaging in buying or selling financial products or services.
2.It is submitted that IGRP is a remedy, which is available to the Investor. The role of the IGRP is limited in nature and restricted to verification of the documents. However, the IBC is available to a particular class of creditors against the Corporate Debtor in respect of the default committed in respect of the financial debt.
3.Counsel has also referred to Section 238 of the Code, which has overriding effect. It is submitted that Intervention Application filed by National Stock Exchange is not maintainable. The Intervenor has no locus to file the Application, which is not a necessary or proper party.
Decision: Hon’ble NCLAT set aside the decision of NCLT admitting the application and held that order passed was not maintainable.
Rationale:
1.Hon’ble NCLAT noted that The last words in the definition of Section 3(7) are “but shall not include any financial service provider”. Thus, any Financial Service Provider are expressly excluded from the definition of ‘corporate person’, which clearly mean that they are not the Corporate Debtor against whom Section 7 Application can be initiated.
2.hon’ble NCLAT relying on Sub-Committee Report contains – Part-I – Introduction, Part-II – Key Issues and Conclusions in Relation to Formulating a Framework for the Resolution of FSP noted that “What is relevant from the above Report is that Sub-Committee also accepted that Registered Stockbrokers in different segments are Financial Service Providers”.
3.It also noted that Memorandum of Association of both the Corporate Debtors against whom Section 7 Applications have been admitted, their services are fully covered by Section 3(16)(e), which is an inclusive definition. It held that the order of the Adjudicating Authority against the Corporate Debtor namely – Simandhar Broking Ltd., who being the Financial Service Provider was an entity against whom no proceedings under Section 7 could have been initiated. Initiation of Section 7 proceedings was itself nonmaintainable and Adjudicating Authority ought to have rejected the Application.
4.It held that 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.
Order:
