Stock Brokers Excluded from Insolvency Proceedings: Tribunal Rules in Favor of Financial Service Providers

The Tribunal held that Financial Service Providers, including the Corporate Debtors who were Stock Brokers and registered with SEBI, are not amenable to insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code. The Corporate Debtors' nature of functions as Financial Service Providers confirmed their exclusion from the definition of 'corporate person'. The National Stock Exchange had the locus standi to challenge the orders, and the Tribunal found that the insolvency proceedings were an attempt to hinder regulatory actions. Consequently, the Section 7 applications were deemed not maintainable, and the Corporate Insolvency Resolution Process against the Corporate Debtors was closed.

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Issues Involved:
1. Maintainability of Section 7 Application under the Insolvency and Bankruptcy Code (IBC) against Financial Service Providers.
2. Nature of functions performed by the Corporate Debtors.
3. Jurisdiction and locus standi of National Stock Exchange (NSE) in filing the appeal.

Issue-Wise Summary:

1. Maintainability of Section 7 Application under the Insolvency and Bankruptcy Code (IBC) against Financial Service Providers:
The core issue in both appeals was whether the Corporate Debtors, being Financial Service Providers, were amenable to proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016. The Tribunal held that Financial Service Providers are expressly excluded from the definition of 'corporate person' under Section 3(7) of the Code, which means they are not Corporate Debtors against whom Section 7 applications can be initiated. The Tribunal emphasized that the Central Government, under Section 227, has the power to notify Financial Service Providers for insolvency proceedings, but only non-banking finance companies with assets of Rs. 500 crores or more have been notified so far. Therefore, the Section 7 applications against the Corporate Debtors, who were Stock Brokers and registered with SEBI, were not maintainable.

2. Nature of functions performed by the Corporate Debtors:
The Tribunal examined the nature of functions performed by the Corporate Debtors, Simandhar Broking Ltd. and Astitva Capital Market Pvt. Ltd. Both entities were engaged in stock broking and trading, regulated by SEBI, and thus fell under the definition of Financial Service Providers as per Section 3(16) of the Code. The Tribunal noted that their services included buying, selling, or subscribing to financial products and were covered under the inclusive definition of 'financial service'. The Memorandum of Association of both Corporate Debtors confirmed their roles as Financial Service Providers, further substantiating their exclusion from the definition of 'corporate person'.

3. Jurisdiction and locus standi of National Stock Exchange (NSE) in filing the appeal:
The Tribunal considered the locus standi of NSE in filing the appeals. NSE, being a Market Regulator with whom the Corporate Debtors were registered, had sufficient locus to challenge the orders of the Adjudicating Authority. The Tribunal found that the proceedings initiated by the erstwhile directors of the Corporate Debtors were intended to stall regulatory actions by NSE and were not genuinely aimed at insolvency resolution. The Tribunal also noted that NSE has its own grievance redressal mechanism for investor complaints, which had already rejected the claims made by the Financial Creditors in these cases.

Conclusion:
The Tribunal concluded that both Corporate Debtors, being Financial Service Providers registered with SEBI and Trading Members of NSE, were not 'corporate persons' under the IBC and hence, Section 7 applications against them were not maintainable. The orders admitting the Section 7 applications were set aside, and the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtors was closed. The Resolution Professionals (RPs) were discharged, and it was directed that they could apply for their fees and expenses. The intervention application by Smt. Prem Kumari was also addressed, allowing her to proceed with her suit for possession in the Commercial Court.

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