Nirmal Kumar Agarwal vs State Bank Of India & Others

IN THE MATTER OF: Nirmal Kumar Agarwal ...Appellant

Versus

State Bank of India & Ors. ...Respondents

Present: For Appellant: Mr. Anup Kumar, Ms. Shruti Singh, Ms. Neha Jaiswal, Advocates For Respondent: Mr. Vaijayant Paliwal, Mr. Nikhil Mathur, Adv. for R1

ORDER (ORAL)

Per: Justice Rakesh Kumar Jain:

19.12.2022: This appeal is directed against the order dated 04.09.2019,

by which an application filed under Section 7 of the Insolvency and

Bankruptcy Code, 2016 (in short 'Code') by the State Bank of India (Financial

Creditor) against the Sungrowth Share and Stocks Limited (Corporate

Guarantor) on account of a default committed by the Corporate Debtor (M/s

Adhunik Alloys & Power Limited) in paying the financial debt of Rs.

63,04,53,226/- has been admitted by the Adjudicating Authority (National

Company Law Tribunal, Kolkata Bench, Kolkata).

2. In brief, M/s Adhunik Alloys & Power Limited) is already in Corporate

Insolvency Resolution Process (CIRP) vide order dated 23.08.2017 of the

Adjudicating Authority. M/s SPV Bhagwati Power & Steel Ltd., Resolution

Applicant has submitted the resolution plan which has been approved by the

Adjudicating Authority on 07.12.2018. In the said proceedings, the State

Bank of India (Respondent herein) has submitted its claim of Rs. 324.73 Crores, which was though considered in the plan but now the Respondent

filed an application under Section 7 of the Code against the Sungrowth who

stood as a Guarantor vide Deed of Guarantee dated 23.09.2011 to the extent

of Rs. 30 Crores for recovery of balance outstanding of the Corporate Debtor

M/s Adhunik Alloys & Power Limited.

3. In the present appeal, Counsel for the Appellant has submitted that the

application filed under Section 7 of the Code was not maintainable and the

Adjudicating Authority had no jurisdiction to initiate the proceedings because

Sungrowth was a non-banking financial institution (NBFC) and was registered

as such by the Reserve Bank of India (RBI) vide certificate of registration no.

B.05.03435, in exercise of the powers conferred on the RBI by Section 45 IA

of the RBI Act, 1934. The certificate was issued on 28.03.2001 and was

granted to carry on business of non-banking financial institution without

accepting public deposits subject to the conditions given in the said

registration certificate.

4. It is submitted that the application under Section 7 was filed on

08.06.2018 whereas the certificate dated 28.03.2001 (Annexure A17) was

cancelled on 09.07.2018 and intimation was given to Sungrowth about it on

11.07.2018. It is not denied by the Respondent that the cancellation of the

certificate was prospective in nature.

5. Counsel for the Appellant has argued that the day on which the

application under Section 7 was filed i.e. 08.06.2018, the registration of

Sungrowth as NBFC was in operation, therefore, the application under

Section 7 of the Code was not maintainable. He has referred to Section 3(7),

3(8), 3(17), 3(18) and Section 5A of the Code to refer to the definitions of the Corporate Person, Corporate Debtor, Financial service provider, Financial

sector regulator and Corporate Guarantor. He has also submitted that

proceedings against the Financial service provider could have been initiated

only in terms of Insolvency and Bankruptcy (Insolvency And Liquidation

Proceedings Of Financial Service Providers And Application To Adjudicating

Authority) Rules 2019 (for short 'Rules') which came into force w.e.f.

15.11.2019 in terms of Section 227 read with clause z k of sub-section 2 of

239 of the Code. He has further relied upon two decisions of this Appellate

Tribunal in the case of Randhiraj Thakur Vs. Jindal Saxena Financial Services

Pvt. Ltd. & Anr., 2018 SCC Online NCLAT 508 and Housing Development

Finance Corporation Ltd. Vs. RHC Holding Pvt. Ltd., 2019 SCC Online NCLAT

398.

6. On the other hand, Counsel appearing on behalf of Respondent has

vehemently opposed the submissions made by Counsel for the Appellant on

the ground that the Appellant was not doing financial services as defined

under Section 3(16) and therefore, the registration of the Appellant dated

28.03.2001 was cancelled vide order dated 09.07.2018/11.07.2018. It is

further submitted that even if the application under Section 7 of the code was

filed on 08.06.2018 and at that time the certificate of registration was in

operation but it came to end during the pendency of the proceedings on

09.07.2018/11.07.2018, therefore, the application filed under Section 7 of

the Code by the Respondent (State Bank of India) was in accordance with law.

It is also submitted that the decision in the case of Housing Development

Finance Corporation Ltd. (Supra), this court has dealt with the issue as to

whether the service provider in that case was providing the financial services or not, therefore, the case of the Appellant is not covered by the aforesaid

decision.

7. However, in rebuttal, Counsel for the Appellant has submitted that

though financial services were provided in terms of Section 3(16)(b), yet the

fact remains that Sungrowth was issued registration by the RBI which was in

operation on 08.07.2018 when the application under Section 7 of the Code

was filed, therefore, initiation of the CIRP proceedings at the instance of

Respondent before the Adjudicating Authority on that date was not

maintainable.

8. We have heard Counsel for the parties and perused the record with their

able assistance.

9. In order to appreciate the rival contentions, it would be relevant to refer

to the definitions of Section 3(7), 3(8), 3(16), 3(17), 3(18), 5A, 227 & 239 (2)

(zk) of the Code.

"3(7) "corporate person" means a company as defined in clause (20) of section 2 of the Companies Act, 2013, a limited liability partnership, as defined in clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008, or any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider;

3(8) "corporate debtor" means a corporate person who owes a debt to any person;

3(16) "financial service" includes any of the following services, namely:--

(a) accepting of deposits;

(b) safeguarding and administering assets consisting of financial products, belonging to another person, or agreeing to do so;

(c) effecting contracts of insurance;

(d) offering, managing or agreeing to manage assets consisting of financial products belonging to another person;

(e) rendering or agreeing, for consideration, to render advice on or soliciting for the purposes of--

(i) buying, selling, or subscribing to, a financial product;

(ii) availing a financial service; or

(iii) exercising any right associated with a financial product or financial service;

(f) establishing or operating an investment scheme;

(g) maintaining or transferring records of ownership of a financial product;

(h) underwriting the issuance or subscription of a financial product; or

(i) selling, providing, or issuing stored value or payment instruments or providing payment services;

3(17) "financial service provider" means a person engaged in the business of providing financial services in terms of authorisation issued or registration granted by a financial sector regulator; 3(18) "financial sector regulator" means an authority or body constituted under any law for the time being in force to regulate services or transactions of financial sector and includes the Reserve Bank of India, the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority of India, the Pension Fund Regulatory Authority and such other regulatory authorities as may be notified by the Central Government;

(5A) "corporate guarantor" means a corporate person who is the surety in a contract of guarantee to a corporate debtor;

227.Power of Central Government to notify financial service providers, etc. Notwithstanding anything to the contrary 1[contained in this Code] or any other law for the time being in force, the Central Government may, if it considers necessary, in consultation with the appropriate financial sector regulators, notify3 financial service providers or categories of financial service providers for the purpose of their insolvency and liquidation proceedings, which may be conducted under this Code, in such manner as may be prescribed.

[Explanation.--For the removal of doubts, it is hereby clarified that the insolvency and liquidation proceedings for financial service providers or categories of financial service providers may be conducted with such modifications and in such manner as may be prescribed.] 239(2) Without prejudice to the generality of the provisions of sub- section (1), the Central Government may make rules for any of the following matters, namely:--

.....

(zk) the manner of conducting insolvency and liquidation proceedings under section 227 ....."

10. Section 3(7) defines corporate person. It categorically states that it will

not include any financial service provider. Section 3(8) defines corporate debtor. which means a corporate person. Meaning thereby in order to become

corporate debtor entity has to be a corporate person but a financial service

provider is not a corporate person. The financial service provider is defined in

Section 3(17) which says that any person to whom registration is granted by

a financial sector regulator. Section 3(18) defines financial sector regulator

which includes the Reserve Bank of India. Financial service is defined under

Section 3(16) which according to the decision of this court in the case of

Housing Development Finance Corporation Ltd. (Supra) is inclusive and not

limited to one which is provided in the said provision.

11. Admittedly, the present proceedings have been initiated against

Sungrowth as a corporate guarantor. Section 5A defines Corporate Guarantor

which means a corporate person. Corporate person, we have already

explained that it would not include a financial service provider. Thus, looking

from any angle, Sungrowth having the registration in terms of Section 3(17)

as financial service provider by the financial service regulator in terms of

Section 3(18) by RBI as on 28.03.2001 which continued up to

09.07.2018/11.07.2018 cannot in any case be called a banking institution. It

has to be called a non-baking financial institution and in such scenario the

application filed under Section 7 of the Code on 08.06.2018 was not

maintainable on that date and therefore, the Adjudicating Authority had no

jurisdiction to invoke its power for the purpose of initiation of CIRP

proceedings. Similar situation arises in the case of Randhiraj Thakur (Supra)

as well as Housing Development Finance Corporation Ltd. (Supra). Thus,

looking from any angle, it is a case in which the Adjudicating Authority has

committed an error in initiating the proceedings under Section 7 of the Code though it was not apprised of the facts that Sungrowth (Corporate Guarantor)

was a financial service provider.

12. In this matter, regard is to be had to the decision of Hon'ble Supreme

Court in the case of Jagmittar Sain Bhagat Vs. Health Services, Haryana,

(2013) 10 SCC 136, in which it has been held that if the Adjudicating

Authority does not have the jurisdiction to initiate the proceedings then the

said proceedings are nonest in the eyes of law and such an issue can be raised

even in appeal also. "Para 9. Indisputably, it is a settled legal proposition that

conferment of jurisdiction is a legislative function and it can neither be

conferred with the consent of the parties nor by a superior Court, and if the

Court passes a decree having no jurisdiction over the matter, it would amount

to nullity as the matter goes to the roots of the cause. Such an issue can be

raised at any stage of the proceedings. The finding of a Court or Tribunal

becomes irrelevant and unenforceable/ inexecutable once the forum is found

to have no jurisdiction. Similarly, if a Court/Tribunal inherently lacks

jurisdiction, acquiescence of party equally should not be permitted to

perpetuate and perpetrate, defeating the legislative animation. The Court

cannot derive jurisdiction apart from the Statute. In such eventuality the

doctrine of waiver also does not apply..." Similar issue was decided by Hon'ble

Supreme Court in the case of Kiran Singh Vs. Chaman Paswan, AIR 1954 SC

340, it has been held that "Para 6. It is a fundamental principle well

established that a decree passed by a Court without jurisdiction is a nullity,

and that its invalidity could be set up whenever and wherever it is sought to

be enforced or relied upon, even at the stage of execution and even in collateral

proceedings. A defect of jurisdiction, whether it is pecuniary or territorial, or whether it is in respect of the subject-matter of the action, strikes at the very

authority of the Court to pass any decree, and such a defect cannot be cured

even by consent of parties."

13. Thus, in view of the aforesaid facts and circumstances, we are of the

considered opinion that there is a merit in the appeal and the same is hereby

allowed and the impugned order is set aside.

It is needless to mention that since the proceedings before the

Adjudicating Authority has been held to be nonest, therefore, the Respondent

(State Bank of India) may initiate proceedings in accordance with law, if so

advised.

[Justice Rakesh Kumar Jain] Member (Judicial)

[Mr. Kanthi Narahari] Member (Technical)

Sheetal/RR