2022 (12) TMI 892 - AT - Insolvency and Bankruptcy

Tribunal rules lack of jurisdiction in insolvency case involving non-banking corporate guarantor

Nirmal Kumar Agarwal Versus State Bank of India & Ors.

The tribunal held that the Adjudicating Authority lacked jurisdiction to initiate insolvency proceedings against a corporate guarantor who was a financial ... Initiation of CIRP - Jurisiction of NCLT to admit the application u/s 7 - Registration of the applicant, non-banking financial institution (NBFC), was cancelled during the pendency of the proceedings - Financial Creditors or not - HELD THAT:- 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. 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. 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 (7) TMI 988 - SUPREME COURT], 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. There is a merit in the appeal and the same is hereby allowed. Issues involved:1. Jurisdiction of the Adjudicating Authority to initiate insolvency proceedings against a corporate guarantor who is a financial service provider.Analysis:1. The judgment pertains to an appeal against the order admitting an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 by a financial creditor against a corporate guarantor for the default committed by the corporate debtor in paying a financial debt. The appellant argued that the application was not maintainable as the guarantor was a non-banking financial institution registered by the RBI, and the registration was cancelled after the application was filed. The respondent contended that the application was valid as the registration was in operation when filed. The appellant cited relevant sections of the Code and previous tribunal decisions to support their argument.2. The tribunal analyzed the definitions of corporate person, corporate debtor, financial service, financial service provider, and corporate guarantor under the Code. It noted that a financial service provider is not considered a corporate person and must be authorized or registered by a financial sector regulator. The tribunal highlighted that the guarantor, being a financial service provider registered by the RBI, could not be classified as a banking institution. Therefore, the application under Section 7 was deemed not maintainable due to lack of jurisdiction by the Adjudicating Authority.3. The tribunal referred to Supreme Court decisions emphasizing that proceedings initiated without jurisdiction are null and void in the eyes of the law. It underscored the importance of jurisdiction in legal proceedings and the inability of parties to confer jurisdiction where none exists. The tribunal concluded that the Adjudicating Authority erred in initiating the proceedings under Section 7 and set aside the impugned order, advising the respondent to pursue proceedings in accordance with the law.4. The judgment highlights the significance of jurisdiction in insolvency proceedings and the necessity for adherence to legal requirements when initiating such actions. It clarifies the distinction between financial service providers and banking institutions, emphasizing the need for proper authorization or registration by regulatory bodies. The tribunal's decision underscores the fundamental principle that proceedings initiated without jurisdiction are invalid and can be challenged at any stage of the legal process.