Introduction
The introduction of the Insolvency and Bankruptcy Code (“IBC”) was aimed to provide a
mechanism for restructuring and rehabilitation of stressed entities. However, in its success
the IBC has left corporate debtors more vulnerable to having insolvency proceedings
initiated against them as means of debt recovery. This is particularly concerning in situations
where the corporate debtor has numerous public stakeholders, or is systemically important
to the economy. Accordingly, the legislature has excluded from the purview of the IBC,
financial service providers, and consequently the resolution of insolvency situations for
these entities was left to the mechanisms provided by the Reserve Bank of India (“RBI”).
This exclusion has been recently contested in a judgement before the National Company
Law Appellant Tribunal (“NCLAT”).

Recent Developments
The NCLAT addressed this issue in the matter of HDFC v. RHC. In this case, an appeal was
filed by HDFC (“Appellant”) against the judgment of the New Delhi Bench of the National
Company Law Tribunal (“NCLT”) which had held that RHC (“Respondent”), the corporate
debtor in this case, was outside the purview of the IBC as it was a non-banking financial
company (“NBFC”).
The Appellant argued that the intent of the legislature in exempting financial service
providers was overlooked by the NCLT judgement. It maintained that the IBC is applicable to
all entities other than those which are specifically engaged in business of providing ‘financial
services’ as listed in Section 3(16). Reliance was further placed on the definition of ‘financial
service provider’ covered under Section 3(17) to suggest that it must be ‘actively’ engaged in
the business of providing financial services, which the Respondent was not, it being merely a
holding company by its own admission.
The Respondent maintained that it qualified as a ‘financial service provider’ and placed
reliance on Randhiraj Thakur v. M/s Jindal Saxena Financial Services, wherein it was held
that an application for initiation of insolvency resolution process was not maintainable
against a company which had been granted the status of NBFC by the Reserve Bank of India
(“RBI”). The Respondent in this case had been issued a Certificate of Registration by the RBI
granting it permission to commence/carry on the business of “non-banking financial
services”. However, it had not been allowed to accept public deposits.
The NCLAT’s judgment hinged on the registration of the Respondent as an NBFC. It noted
that Section 3(7), which defines a ‘corporate person’, excludes from its definition any
‘financial service provider’ (and consequently excludes the same from the definition of a
‘corporate debtor’). To qualify as a ‘financial service provider’, a person must be “engaged in
the business of providing financial services in terms of authorisation issued or registration
granted by a financial sector regulator”. Section 3(16) provides a non-exhaustive list of
‘financial services’. It held that it is not necessary that ‘financial service providers’ must
accept deposits. If any of the services under Section 3(16) are being provided, then the

definition of ‘financial service provider’ would be sufficiently met, as the list provided in the
definition is an inclusive list.
The NCLAT also considered the definition of ‘financial institutions’ in Section 45-I(c) of the
Reserve Bank of India Act, 1934 (“RBI Act”), which includes in its ambit any non-banking
institution which carries on as its business or part of its business the “acquisition of shares,
stock, bonds, debentures or securities issued by a Government or local authority or other
marketable securities of a like nature”. Relying further on this definition, the NCLAT held
that the Respondent qualifies as a ‘financial institution’ under the RBI Act and would
therefore also qualify as a ‘financial service provider’ under the IBC.
International Perspective
The insolvency Code in India has been drafted placing significant reliance on the UK
Insolvency Act and then moulding the same as per the Indian scenario. Under the UK
Insolvency Act, 1986, if an insurance company (a FSP as per the Code), were to fail,
procedures that apply to all insolvent companies would apply, subject to certain
modifications to ensure protection of the policy-holders. As per the Financial Services and
Markets Act 2000 (FSMA) of UK, Insurance companies are not entitled to enter into
voluntary liquidation, but can be wound up by the UK Insolvency Act in the event of failure.
Section 122 of the UK Insolvency Act sets out the circumstances in which a company may be
wound up by the court and carves out no exception for insurance companies or any other
systemically important industry, whatsoever. Considering the massive impact on admission
of an insurance company for winding up, if the court does decide to wind up the insurer, the
Insurers (Reorganisation and Winding Up) Regulations 2004 (the Reorganisation
Regulations) of UK will apply. Hence, despite the probable impact of failure of FSPs in major
economies being in multiples as compared to the Indian economy, the insolvency law of
other economies have laid down similar procedures to deal with insolvency of financial
companies of systemic importance as for other companies. Thus, where companies of major
significance to the economies are also covered under the purview of insolvency law,
exclusion of NBFCs from Code does not seem to be justified.
Analysis
The NCLAT in pronouncing this judgment, limited itself to the letter of the law. The
arguments advanced by the Appellant aimed to highlight the purposive intent of the
legislature in excluding the applicability of the IBC and consequent insolvency proceedings
to financial service providers. The rationale behind this exclusion, would reasonably be to
safeguard such financial service providers, which otherwise play a key role in the economy.
The failure of a systemically important financial institution could cause a domino effect
resulting in a financial crisis that could crumble the economy. Moreover, the stakeholders in
these financial institutions, would be members of the public whose interests must be
safeguarded first and foremost.
Therefore, NBFCs, specially which are deposit taking, or systemically important, would be
important to be protected from an economic standpoint in public interest. However, there
seems to be little cause to extend this protection to NBFCs which becoming insolvent would

otherwise have no impact on the general public. Moreover, the NCLAT placed reliance on
the definitions under the RBI Act, the language of which is generally broader to bring an
increased number of entities under the purview of the RBI and the regulations made by it.
While the general intent of section 45-I(c) the RBI Act is to cast a wider net, the provisions of
the IBC are only meant to exclude applicability to entities, where there is a significant
impact to public interest.
Conclusion
The NCLAT judgment however, has only considered the letter of the law, without delving
into the statutory intent. It is highly unlikely that the intent of the legislature to exclude the
applicability of the restructuring mechanism under IBC to NBFCs, was simply because they
have been registered with the RBI, without due consideration on the extent of the impact, if
any, that such transaction might have with respect to the general public. In this instance,
there seems to be no rationale behind excluding an NBFC which does not accept deposits
and is not systemically important, to be proceeded against under IBC.

-Insha Bhurani

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