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Issues Notice on Plea Against NCLAT Order on Deregistered NBFC's IBC Status
The on Thursday issued notice in a challenge to a ruling that refused to allow a deregistered non-banking financial company (NBFC) to initiate insolvency proceedings against itself under the . The case raises a critical question: whether a company that has lost its registration as an NBFC continues to be a "" under the IBC, thereby excluding it from the definition of a "" eligible to file for corporate insolvency resolution.
A Division Bench of Justices B.V. Nagarathna and R. Mahadevan issued notice on the filed by , which challenged the NCLAT's order. The tribunal had upheld the 's decision rejecting Asmitha's Section 10 IBC application on the ground that the company remained a despite the cancellation of its by the RBI.
Background: The Asmitha Microfin Story
was incorporated in with the primary objective of carrying on microfinance business. It obtained an RBI Certificate of Registration as an NBFC on , and subsequently operated across several states. However, the company's recovery of loans was severely affected following the enactment of the , which left Asmitha unable to service debts owed to banks and other financial institutions.
After efforts to revive the business failed, the RBI cancelled Asmitha's CoR on , for failure to maintain the prescribed and . The cancellation attained finality. The RBI then directed Asmitha to dispose of its financial assets and bring them below 50% of its total assets within three years. It also required the company to submit audited financial statements for the following three years and pass a Board resolution stating that it would not carry on NBFC business without obtaining a fresh CoR.
Despite these directions, Asmitha later approached the NCLT under , contending that it had ceased its NBFC operations and was no longer a . The company argued that the cancellation of its registration had stripped it of that status, making it a "" eligible to initiate the .
NCLT and NCLAT Decisions: A Consistent Rejection
The NCLT, Hyderabad Bench, rejected Asmitha's Section 10 application in February 2024, holding that the company continued to be a "" under and was therefore excluded from the definition of a "" under Section 3(7). The NCLT noted that Asmitha's financial assets were artificially brought below ₹500 crore through write-offs and that the company remained under the RBI's regulatory supervision. The company had not controverted these findings.
The NCLAT affirmed the NCLT's decision. It held that cancellation of the company's Certificate of Registration did not change its status as a . The tribunal reasoned that Asmitha was still subject to RBI's regulatory oversight and had not fully divested its financial assets. Therefore, it remained excluded from the definition of "," making its Section 10 application non-maintainable.
Proceedings: The Core Arguments
Appearing for
,
argued that the company was no longer an NBFC when it filed its Section 10 application, as the RBI had already cancelled its CoR.
"Much prior to my filing this application, RBI cancels my registration, tells me I'm no longer a non-banking financial company,"
Reddy submitted.
Reddy placed strong reliance on the 's recent judgment in
, which he argued supported the proposition that the status of a
must be considered on the date when a Section 7 or Section 10 application is filed.
"The NCLAT states and the
upholds this principle that once a
is, a certificate is cancelled. The date on which section 10 or section 7 is filed would be the relevant date. They can't be treated as a
,"
he contended.
Furthermore, Reddy pointed out that the RBI itself had taken the position that following cancellation of the CoR, the company was no longer a
.
"RBI says no, once we cancel, they can't come before us,"
he argued, contrasting this with the NCLT's contrary view. The
, after hearing the submissions, simply directed,
"Issue notice to the respondents,"
without staying the operation of the NCLAT order.
Legal Analysis: The Core Issue of Definitional Exclusion
The central legal question before the is whether a company that has lost its registration as an NBFC can still be treated as a "" under the IBC. defines a "" by reference to activities regulated by financial sector regulators like the RBI. The exclusion from "" under Section 3(7) means such entities cannot file for CIRP under Section 10. Instead, they are subject to a separate insolvency framework under , which is yet to be fully notified.
The NCLAT's reasoning focused on the substance of the company's operations rather than the form of registration. It noted that Asmitha still held financial assets, was under RBI's regulatory supervision, and had not completely exited the NBFC business. The tribunal's approach suggests that deregistration alone does not automatically strip an entity of its status as a —particularly where the entity continues to hold financial assets and remains subject to regulatory oversight.
However, the 's decision in Ankush Saluja may provide a counterpoint. In that case, the Apex Court held that the status of a must be assessed at the time of filing the application. If the registration is cancelled prior to filing, the company may no longer be a . The will now have to reconcile these competing perspectives.
Impact on Legal Practice and the IBC Framework
This case has significant implications for the insolvency ecosystem. Many NBFCs and other financial service providers that have lost their regulatory registration may seek to use the IBC to resolve their financial distress. If the rules in favour of Asmitha, it could open the door for such entities to file for CIRP, potentially leading to a surge in insolvency applications from deregistered financial firms.
On the other hand, if the court upholds the NCLAT's view, it would reinforce the principle that the IBC's exclusion for financial service providers is not easily shed. Entities would need to demonstrate a complete cessation of regulated activities and regulatory oversight before they can be considered "corporate persons." This could force deregistered NBFCs to pursue alternative resolution mechanisms, such as liquidation under the or voluntary winding up, rather than the IBC's CIRP.
The case also highlights the tension between the RBI's regulatory regime and the IBC's insolvency framework. The RBI's stance—that once it cancels a registration, the entity is no longer a —suggests a desire to push such entities into the IBC fold. However, the NCLAT's contrary view creates uncertainty. The 's clarification will be eagerly awaited by insolvency professionals, financial creditors, and corporate debtors alike.
Conclusion
The 's decision to issue notice indicates that it considers the issue worthy of detailed examination. The interplay between the IBC's definitional exclusions and the effect of regulatory deregistration is a that will shape the insolvency landscape for financial service providers. As the case progresses, the legal community will closely watch for the court's interpretation of the relevant provisions and its application of the Ankush Saluja precedent.
For now, must wait for the respondents to file their replies. The outcome of this petition could redefine the boundaries of the IBC's applicability to entities that have fallen out of regulatory compliance but remain entangled in financial operations.
