NCLT Hyderabad Rules, Information Utility Record Is Not Mandatory To Prove Debt And Default Under IBC
Pranav B Prem
The National Company Law Tribunal (NCLT), Hyderabad Bench comprising Justice Rajeev Bhardwaj (Judicial Member) and Shri Sanjay Puri (Technical Member) has clarified that proving debt and default through records of default with the information utility is not mandatory. It held that if the financial creditor establishes debt and default through other cogent evidence, a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) can still be admitted.
Background
The petition was filed by Vardhaman Bank under Section 7 of the IBC seeking initiation of the Corporate Insolvency Resolution Process (CIRP) against Karvy Stock Broking Limited (Respondent) in respect of default arising from commercial paper subscribed by the bank.
The bank subscribed to commercial paper worth ₹5 crores issued by the Respondent in June 2019, which matured on 10.12.2019. On presentation for redemption, the commercial paper was dishonoured as the Respondent failed to provide funds. Despite repeated reminders, the amount remained unpaid. In emails dated 14.04.2020 and 06.10.2020, the Respondent admitted its liability but cited Covid-19 restrictions as a reason for non-payment.
The Bank also exercised its right of set-off in respect of certain deposits and adjusted about ₹2.80 crores against the liability, leaving an outstanding of over ₹4.02 crores, which included principal and interest.
Submissions
The Applicant Bank argued that the Respondent, being a stock broker, did not fall within the definition of a “financial service provider” under Section 3(17) of the IBC. It contended that dealing in securities for clients cannot be equated with rendering financial services as contemplated by the Code. It was further argued that debt and default stood proved through the Respondent’s repeated acknowledgments, and that filing a record of default with the Information Utility is not a mandatory requirement but merely directory in nature.
The Respondent, on the other hand, argued that it was a financial service provider within the meaning of Section 3(17) of the IBC since it was registered with SEBI as a stock broker. Relying on precedents including Union of India v. IL&FS, it submitted that being a financial service provider, it fell outside the definition of “corporate person” and therefore outside the scope of the IBC. It also argued that the petition was defective for want of compliance with Section 7(3) since no record of default with the Information Utility was filed. The Respondent further claimed that it was solvent and financially viable, and the petition was nothing but a misuse of IBC as a recovery mechanism.
Tribunal’s Findings
The Tribunal first noted that the Respondent had indeed defaulted on the commercial paper obligations, and there was clear evidence of debt and default. However, it proceeded to examine whether the Respondent qualified as a “corporate person” for the purposes of Section 7 proceedings.
Relying on the definitions of “financial service” and “financial service provider” under Sections 3(16) and 3(17) of the IBC, and Section 2 of the Securities Contracts (Regulation) Act, 1956, the Bench held that stock brokers, by virtue of dealing in securities, are engaged in financial services. The Tribunal observed: “The definition of ‘financial product’ is broad and includes securities, deposits, and loans, among others. A stock broker’s core function is buying, selling, and dealing with securities – activities expressly covered by the Code. Therefore, the Respondent’s activities fall squarely within the parameters of a financial service provider.”
The Bench also clarified that even though SEBI subsequently cancelled the Respondent’s registration on 31.05.2023, the debt in question arose prior to such cancellation, during which period the Respondent was actively engaged in stock broking. Accordingly, the Respondent continued to fall within the exclusion carved out under Section 3(7) of the IBC.
On the issue of furnishing record of default with the Information Utility, the Tribunal held that the requirement under Section 7(3) is directory and not mandatory. It explained that the provision uses the word “or”, thereby permitting the Adjudicating Authority to ascertain default either through the Information Utility or from other evidence produced by the creditor. Relying on the Supreme Court’s decision in Suresh Kumar Reddy v. Canara Bank (2023), the Bench reiterated that absence of an Information Utility record cannot by itself defeat a Section 7 petition if other reliable evidence establishes default.
It further held that the bar under Section 10A of the IBC (relating to defaults during the Covid-19 protection period) was not attracted since the initial default had occurred on 10.12.2019, prior to the protected period. The Tribunal also rejected the Respondent’s reliance on Vidarbha Industries as it failed to demonstrate financial viability.
While the Tribunal categorically ruled that proof of default need not be confined to records of the Information Utility, it ultimately dismissed the petition. The dismissal was on the ground that the Respondent, being a financial service provider, is excluded from the definition of “corporate person” under Section 3(7) of the IBC. Consequently, proceedings under Section 7 of the Code were held to be not maintainable against the Respondent.
Appearance
For the Petitioner: Ms.Mummaneni Vazra Laxmi, Mr.V.V.S.N.Raju, Counsels
For the Respondent: Mr.Avinesh Desai, Sr.Counsel, Mr. Nethan Reddy Mallu, Counsel
Cause Title: Vardhaman Bank V. Karvy Stock Broking Ltd
Case No: Company Petition IB/62/7/HDB/2023
Coram: Justice Shri. Rajeev Bhardwaj [Hon'ble Member], Shri. Sanjay Puri - [Hon'ble Member -Technical ]
