Asmitha Microfin Limited vs Reserve Bank Of India

(Hybrid Mode)

[ORAL JUDGMENT: Justice Sharad Kumar Sharma, Member (Judicial)]

There are a few basic facts which are inevitably required to be considered and referred in the instant Appeal where the Appellant puts a challenge to the impugned order of 12.02.2024, as passed by Ld. NCLT, Hyderabad Bench in CP (IB) NO. 23/10/HDB/2022, resulting into rejection of the application that has been preferred by the Appellant/Applicant under Section 10 of the I & B Code, 2016. They are narrated below.

The Appellant, on 12.01.2022, had filed an application under Section 10 of the I & B Code, by instituting the same in the shape of Form 6, as it stood prescribed under Rule 7 (1) praying for initiation of Corporate Insolvency Resolution Process (CIRP), granting moratorium and appointment of Interim Resolution Professional (IRP) as prescribed under the Code and Rules thereon, in respect of the Appellant, Asmitha Microfin Limited, on the ground that the Appellant had defaulted in the payment of the debts availed by it from the banks due to its inability to service the said debts on account of insufficient generation of funds from its operations.

In the application thus preferred, the Appellant contended that it was incorporated as a company way back in 2001, with the main object of carrying out "Micro Finance Business" and accordingly got itself registered as a Non-Banking Finance Company (NBFC) under Section 45(IA) of the RBI Act, 1934 and obtained a certificate of registration as a NBFC on 07.06.2002. After getting the Certificate of Registration, the Appellant had been carrying out their business activities, including the business of microfinance in about fourteen states of the country, including the state of undivided Andhra Pradesh. However, pursuant to the enactment of the Andhra Pradesh Microfinance Institutions (Regulation of Money Lending Act), 2010, the process of recovery of the advances made by it was severely affected, resulting in its inability to service the debts taken from the financial institutions including banks.

The Appellant contended that in view of the above, the company was referred to Corporate Debt Restructuring (CDR) and as per restructuring package approved by CDR Empowered Group, the outstanding loans taken from the banks and the FIs were restructured in September 2011, by entering into Master Restructuring Agreement dated 24.09.2011, by which 30% of the company’s debt, amounting to Rs. 350 Crores was converted into Optionally Convertible Cumulative Redeemable Preference Shares (OCCRPS) redeemable over a period of 7 years at a coupon rate of 12% per annum and the balance debt amounting to Rs. 808.2 Crores were structured to be repaid over a period of 7 years, including 1 year moratorium, with interest at the rate of 12% per annum payable with effect from 30.04.2012. However, despite of the aforesaid efforts, it failed to succeed in servicing the debts of its Creditors, because it could not recover the loans advanced to its borrowers in the states of Andhra Pradesh and Telangana. A number of other steps were also taken by the Appellant in consultation with the lenders such as requesting RBI to relax the norms in respect of Net Owned Funds (NOF) and Capital Adequacy Ratio (CRAR) for a certain period so as to continue its operation as a NBFI-MFI. However CDR mechanism was withdrawn by RBI in 2018 and all the processes taken up towards reviving the business of the Appellant company came to a halt.

It is an admitted case of the Appellant, that owing to the fact that it was unable to achieve the specified NOF and CRAR, subject to which it was permitted to carry on the business of a NBFI, RBI cancelled the Certificate of Registration (CoR) granted to it under Section 45(IA) of the RBI Act, 1934, on 22.02.2019 as per the provisions under Section 45(IA)(6) of the RBI Act, 1934, and the said cancellation has attained finality. In continuation of the said order of cancellation, RBI in its letter dated 03.04.2019 directed that the Appellant company, even after cancellation of the certificate of registration, will still continue to be governed by the relevant provisions of RBI act, 1934 and various directions/instructions issued by RBI from time to time and further advised the Appellant to dispose of its financial assets and bring them below 50% of the total assets within 3 years from the date of cancellation of Certificate of Registration, to submit an audited financial statement for the next 3 years and to pass a specific board resolution not to carry on the business of a NBFI and to submit a certified copy of the same along with a Statutory Auditor’s certificate to that effect for its record. The relevant directions given therein, are extracted hereunder: -

"In continuation of the afore-mentioned letter, we further advise that your company still continues to be governed by the relevant provisions of the Reserve Bank of India Act, 1934 and various directions / instructions issued by RBI from time to time. In order to comply with PBC Norms, you should dispose of the financial assets and bring it below 50% of the total assets within three years from the date of the cancellation of Certificate of Registration. You are also directed to submit audited financials for the next three years."

In continuation, the Reserve Bank of India, had published a notification on 22.04.2019, notifying the cancellation of Certificate of Registration of various NBFCs, where the name of the Appellant finds place as Serial No. 10 of the said notification.

The net effect of these aforesaid orders / letters issued by RBI was that the Appellant ceased its operation as a NBFI and surrendered its Certificate of Registration. Since the business of the Appellant company came to a standstill, having exhausted all possibilities of reviving the business, the Appellant company in consultation with the lenders, decided to approach Ld. NCLT under Section 10 of IBC for resolution of its insolvency and filed the necessary application being CP(IB) No. 23/2022. The said application was taken up for consideration by Ld. NCLT and after hearing the Appellant, the Financial Creditors and RBI, Ld. NCLT rejected the said application on the grounds that the Appellant continues to be a financial service provider and thus stands excluded from the definition of “corporate person” as defined in Section3(7) of the code and therefore, the petition preferred under Section 10 of the code is not maintainable at the behest of the Appellant. It is this order of rejection, which is being challenged by the Appellant in the instant appeal.

The Ld. Senior Counsel for the Appellant contends that it had taken all possible efforts to revive the CD as per advice given by RBI and by the lenders as detailed above. It has complied with the directions given by RBI in its various communications, has ceased to carry on its business with effect from 22.02.2019, and has also surrendered its Certificate of Registration and submitted the necessary Board Resolution to that effect vide its letter dated 08.04.2019. However, since the business of the CD could not be revived, the matter was deliberated in the joint lenders' meeting dated 19.04.2021, and based on such deliberations, it had filed the application under Section 10 of the code on 18.10.2022. Based on the direction of Ld. NCLT, it had issued notices to all 24 Financial Creditors on the application filed by it. Out of the 24 Financial Creditors, 5 Financial Creditors had filed their counters. Out of them, Indian Bank had stated that it had no objection if the said application is admitted, but the other 4 banks, that is, SIDBI, PNB, SBI and Kotak Mahindra Bank had objected to the application on the ground that the Appellant herein is a financial service provider in terms of Section 3(17) of the code and CIRP cannot be initiated in the instant case under Section 10 of the code.

He has submitted that financial service is defined in Section 3(16) of the code and Financial service provider is defined in Section 3(17) of the code. As per Section 3(17), financial service provider will mean a person engaged in the business, providing financial services in terms of authorisation issued or registration granted by a financial sector regulator. Thus, two essential conditions have to be satisfied by a person to fall within the meaning of the term financial service provider, which are that such person should be engaged in the business of providing financial services and that such business of providing financial services must be carried out in terms of authorisation issued / registration granted by a financial sector regulator. He has further submitted that the Appellant herein is neither engaged in business of providing financial services, nor it has a registration certificate granted by any financial sector regulator and that the registration certificate issued to it was cancelled pursuant to the order of RBI dated 22.02.2019 and it has since surrendered the same. Therefore, the Appellant company will not fall within the definition of Section 3(17) of the Code.

He has submitted further that based on the objections raised by the Financial Creditors, Ld. NCLT was of the opinion that RBI needs to be impleaded as a Respondent for proper and effective adjudication of the application under Section 10 of the code, and accordingly, RBI was impleaded as Respondent and notice was issued to RBI. RBI in its counter, had categorically stated that it has no role to play in the CIRP against the Appellant company as the Appellant company does not fall within the definition of financial service provider, However, despite the statement of RBI that the Appellant company is not a financial service provider, Ld. NCLT held that the Appellant is a financial service provider, on the premise that on the date of lending by the Financial Creditors to the Appellant company (commencing from the year 2008) and on the date of default by the Appellant on such loans (commencing from the year 2015), the Appellant was a financial service provider, overlooking the fact that on the date of filing of the application under Section 10, it had already ceased to be financial service provider.

Ld. Senior counsel for the Appellant has further submitted that he has submitted a list containing the details of the debt owed to the Financial Creditors and the defaults thereof, along with supporting documents and these documents clearly establish that there is a debt and there is a default, and that, based on these documents alone, the application under Section 10 of the code ought to have been admitted. The said documents are given in clause-8 of Part-III of the application filed by the Appellant under Section 10 of the Code. The said part is extracted hereunder:

He has further contended that in accordance with objective of the code, a dead wood, that is, a company deeply plagued with insolvency needs to be weeded out to meet the objectives of the Code of not to continue with a financially crippled company. Therefore, the Appellant company, being in debt and in default and with no chances of revival of business as all options to revive the same have been exhausted, ought to have been admitted into CIRP to address its insolvency suitably, as per the provisions of the code.

In its counter before the Ld. NCLT, and also the counter filed before this Tribunal, the Reserve Bank of India has stated the following:

a. RBI has cancelled the certificate of registration (CoR) of the Appellant company on 22.02.2019 and therefore the said company does not fall within the definition of financial service provider with effect from the said date. Hence, RBI has no role in the CIRP against the company.

b. As per the press release dated 04.08.1999 by it, a company will be treated as NBFC if its financial assets constitute more than 50% of its total assets (netted off by intangible assets) and the income from the financial assets is more than 50% of the gross income. These two criteria will determine whether ‘financial service’ is the principal business of a company. Accordingly, RBI while cancelling the CoR, advised the company to dispose of the financial assets and bring it below 50% of the total assets within three years from the date of cancellation of CoR, in order to come out of the Principal Business Criteria (PBC) stipulated for NBFCs. The company was also directed to submit audited financials for the next three years to monitor as to whether it is carrying out NBFC activity unauthorisedly without CoR from RBI. This advice had been given in exercise of the powers conferred under law to RBI and the same can, in no way be construed to mean that the Appellant company will remain to be a NBFC (financial service provider) within the regulatory purview of RBI till the financial assets are brought below 50% of its total assets.

c. Under the powers conferred under Section 227 read with Section 239(2)(zk) of IBC, the central government has framed and notified on 15.11.2019, the ‘Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019’ and further, has issued a notification dated 18.11.2019 under Section 227 of the code to the effect that RBI is the appropriate regulator for non-banking finance companies with asset size of Rs. 500 crore or more as per the last audited balance sheet. In the instant case, the Appellant is neither carrying on the business of providing financial services in terms of authorisation issued / registration granted by a financial sector regulator, nor its asset size is more than Rs. 500 crore. In that context, RBI has specifically pleaded in their counter that its role vis-à-vis the Appellant herein is limited and hence it may not be a necessary party for the purposes of the proceedings under Section 10 of the Code, before the Ld. NCLT. d. The RBI has submitted that, Section 6 of the Code prescribes as to who can initiate CIRP in case a corporate debtor commits a default. Section 6 of the Code, 2016 is extracted hereunder:-

Based on the above, RBI has contended that in the instant case, it is neither a Financial Creditor nor an Operational Creditor nor a Corporate Debtor and hence it has no role to play in the CIRP process. e. Further, the Appellant is not a financial service provider as per the definition provided under Section 3(17) of the I & B Code, which is extracted hereunder.

Appellant was a ‘financial service provider’ till its certificate of registration remained ‘live’ and from the date on which the certificate of registration granted to the Appellant was cancelled, the Appellant is no longer a ‘Financial Service Provider’ in terms of Section 3(17) of the Code, and therefore, RBI has no role to play as a ‘financial sector regulator’ in initiating CIRP proceedings against the Appellant.

Further, as the Appellant is not a Financial Service Provider, it will not get excluded from being a ‘Corporate Person’ as per Section 3(7) and since it owes debt to the Financial Creditors, it will become a ‘Corporate Debtor’ within the meaning of Section 3(8) of the Code and can initiate CIRP under the provisions of Section 6 of the Code by filing an application under Section 10 of the code. However, in the said CIRP process. RBI will have no role to play.

As far as the Financial Creditor banks are concerned, 5 out of the 24 banks had filed their counter-affidavits before Ld. NCLT and the same five banks have also appeared before this appellate tribunal. Out of them, Indian Bank has supported the stand taken by the Appellant that Section 10 application filed by the Appellant is maintainable. The other 4 banks, namely, SBI, SIDBI, PNB and Kotak Mahindra Bank have opposed the Section 10 application before Ld. NCLT and also the appeal filed by the Appellant before this Tribunal. The main contentions of these 4 banks while opposing the application are summarised below:

500 crores till FY 2020-21. In FY 2019-20 the total asset size of the company was Rs. 783.33 crore with financial assets accounting for Rs. 780.41 crore of the same. Despite the direction of RBI in 2019 to dispose of the financial assets and bring it below 50% of the total assets within three years from the date of the cancellation of the certificate of registration, the Appellant company did nothing to recover the loans disbursed for 2 years from the date of issue of such directions and instead, has deliberately written off long-term advances of Rs. 381 crores (nearly half of the total assets) in the financial year 2020-21 alone so as to bring the total asset size below Rs. 500 crores with the sole intention of coming out of the regulatory purview of RBI as contemplated in the notification S.O.4139(E) dated 18.11.2019 issued by Ministry of Corporate Affairs, Government of India. This write-off is in the nature of technical write-off and should be ignored for the purpose of computing the threshold contemplated in the aforesaid notification. Accordingly, the asset size of the Appellant company will stand well above the threshold of Rs. 500 crore and the Appellant will be bound by the provisions of Section 227 of the Code and the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudication Authority) Rules, 2019. As per the said Rules, CIRP has to be initiated against the present Appellant upon an application made by the appropriate regulator in accordance with Rule 6 of the said Rules and therefore, the application filed by the Appellant under Section 10 of the Code is not maintainable.

Accordingly, the Financial Creditors have submitted that on account of the aforesaid grounds the order of Ld. NCLT holding the petition filed under Section 10 of the Code as not maintainable, is correct and therefore, the instant Appeal may be dismissed.

The question that is posed to us to answer is as to whether the application filed by the Appellant company under Section 10 of the Code is maintainable. The provisions contained under Section 10 of the I & B Code, is extracted hereunder:

As per the provisions of Section 10 are extracted above, the application will be maintainable provided (a) the corporate applicant is a corporate debtor, (b) it has committed a default in repayment of the debt taken by it, (c) the debt and the default are prime facie established, (d) a special resolution is passed by shareholders of the corporate debtor approving filing of the application, and (e) the application is complete in all respects.

Ld. NCLT while dealing with the aforesaid questions, has come to the conclusion that the Appellant is a financial service provider in terms of Section 3(17) of the Code and therefore, is not a corporate person in terms of Section 3(7) of the Code and consequently, is not a corporate debtor as envisaged under Section 3(8) of the Code and therefore, application filed under Section 10 of the Code at the behest of the Appellant is not maintainable in accordance with the provisions of Section 10(1) of the Code. Ld. NCLT has come to this conclusion on the basis that the Appellant was an NBFC registered with RBI and had obtained a certificate of registration, till it was cancelled on 22.02.2019, that even after such cancellation, it remained under the control and supervision of RBI as can be seen from the letter of RBI dated 03.04.2019, that the assets of the Appellant are predominantly financial assets and as per the principal business criteria formulated by RBI, the Appellant will remain as a NBFC, that its asset size exceeds Rs. 500 crores, which was artificially brought down below Rs. 500 crores only in the financial year 2020-21 and that such reduction may not stand the scrutiny of law because it was done in a manner contrary to the spirit of the direction issued by RBI and therefore, RBI will be the Appropriate Regulator and that on the date of default, the Appellant remained a financial service provider and even after cancellation certificate of registration, it will continue to be a financial service provider because its basic characteristics has not changed.

Admittedly, the Appellant was a financial service provider, having got the certificate of registration from RBI on 07.06.2002 to carry on the business of a NBFC subject to compliance with the provisions of the RBI Act, Guidelines and Directions of the Bank from time to time and also the terms and conditions subject to which the CoR was issued. Further, on request from the Appellant, it was reclassified as an NBFC-MFI on 18.12.2014 and a fresh CoR was issued. The said Certificate of Registration was cancelled by an order dated 22.02.2019 on the basis of inability of the Appellant to maintain minimum Net Owned Fund (NOF) and Capital to Risk Assets Ratio (CRAR) as specified by RBI. Appellant was further directed on 14.03.2019 not to carry on the business of a NBFI as defined in Section 45-I(a) of RBI Act without obtaining a fresh CoR from the Bank and to pass a specific Board Resolution to that effect. Further, in its letter dated 03.04.2019, RBI directed the Appellant to dispose of the financial assets and to bring the same below 50% of that total assets withing 3 years from the date of the cancellation of the CoR and also to submit audited financials for the next 3 years.

The Appellant claims that its CoR has been cancelled and it has since surrendered the same pursuant to the directions of RBI, that it has stopped the business of providing micro-finance and that it has brought down the size of its total assets to a level below Rs. 500 crore and therefore, it is no more a financial service provider and it will not come under the regulatory purview of RBI which is envisaged under Section 227 of the Code and therefore, its application filed under Section 10 of the Code is maintainable.

On the other hand, Ld. NCLT has held that the certificate of registration of the Appellant had been cancelled in view of its failure to achieve NOF and CRAR, and not because a change of its activity and that because RBI has categorically clarified that the company will continue to be governed by the relevant provisions of RBI act, 1954 and various directions/instructions issued by it from time to time, the Appellant company will remain to be a financial service provider in terms of Section 3(17) of the code even after cancellation of the certificate of registration. Further, the finding of Ld. NCLT, that the financial assets of the company has been artificially brought down below 500 crores, by simply writing it off instead of trying to recover them in contravention of the directions of RBI and that the share of financial assets in the total assets of the company has not been brought below 50%, has not been controverted by the Appellant. In that view, the conclusion of NCLT that the Appellant remains to be a financial service provider and that it continues to be under the regulatory supervision of RBI, even after cancellation of the certificate of registration, cannot be faulted.

In light of the above, the conclusion arrived at by Ld. NCLT that 'the Appellant company is a financial service provider and thus, stands excluded from the definition of corporate person defined in Section 3.(7) of the code and therefore chapter-II of I&B Code will not be applicable to the petition filed by the Appellant for initiation of CIRP and that consequently, the application is not maintainable at the behest of the Appellant and hence it is dismissed' does not require any interference at our hands. Thus, the Company Appeal lacks ‘merit,’ and the same is accordingly ‘dismissed’.