Previously, the Jaipur Bench of NCLT dismissed an insolvency petition against Jumbo Finvest, noting that it qualifies as a Financial Service Provider under 3(17) of the Insolvency & Bankruptcy Code and is not classified as a corporate entity where a Section 7 application can be filed.
Equitas Small Finance Bank contested this decision before the National Company Law Appellate Tribunal, arguing that Jumbo Finvest holds registration as a financial service provider from the RBI.
On January 16, 2020, the banking sector regulator prohibited Jumbo Finvest from enlarging its balance sheet and accessing public funds or extending loans until further notice. It was claimed that, following the RBI’s order, Jumbo Finvest is not functioning as a financial service provider, and thus, the protections outlined in the Code do not apply in this case.
However, the NCLAT remarked: “We are not convinced by the argument that due to the prohibition order from RBI, the Respondent (Jumbo Finvest) loses its status as a financial service provider.” NCLAT noted that Jumbo Finvest’s registration was revoked on October 14, indicating it was a recognized financial service provider until the cancellation date.
“We believe that the provisions of the Code are applicable, and the mechanism outlined in the Code for initiating CIRP against a financial service provider must adhere to the Code,” stated the NCLAT bench consisting of Justice Ashok Bhushan and Member (Technical) Barun Mitra.
Financial Service Providers (FSPs) such as NBFCs, banks, and insurers were initially excluded from the standard Corporate Insolvency Resolution Process (CIRP) under IBC, but were subsequently included under special provisions via notifications and rules (like the FSP Rules, 2019) for systemic cases.
Currently, CIRP can be initiated against these entities, but typically, the relevant regulator, like the RBI, must file the application instead of any creditor, requiring regulator approval for resolution plans to ensure public interest and proper management.
“Therefore, we find no fault in the Adjudicating Authority’s order rejecting the Section 7 application. We clarify that the rejection of the Section 7 application does not preclude the Appellant from pursuing any legal remedies available concerning its dues against the Respondent,” stated NCLAT.
