Religare Enterprises Dodges Insolvency On ‘Corporate Debtor’ Definition

“What’s in a name?” playwright William Shakespeare wrote in the classic Romeo and Juliet over four centuries ago.

Things have changed since and today not only names, but the definition, especially, in the eyes of the law, also matters, as it could have serious consequences for the parties involved in the legal suit.

This was evident in a judgment passed by the New Delhi bench of India’s National Company Law Tribunal (NCLT) recently. The tribunal dismissed a petition to initiate corporate insolvency resolution process (CIRP) against the “corporate debtor” Religare Enterprises Ltd., a non-banking financial company (NBFC).

The NCLT bench, comprising its President Ramalingam Sudhakar and Technical Member Atul Chaturvedi, passed the order on 11 July.

BACKGROUND

In March 2023, Ligare Aviation Ltd. (applicant) filed an application under Section 7 of the Insolvency and Bankruptcy Code (IBC) 2016 before the NCLT against Religare, the corporate guarantor of the principal borrower Auriga Marketing Services Private Ltd.

Ligare filed the petition on the ground that the principal borrower defaulted to make a payment of 35.55 crore rupees ($4.33 million) at an interest of 14.25% per annum, totaling 74.20 crore rupees as of 27 January 2023.

The financial creditor invoked insolvency against Religare for being the corporate guarantor of the principal borrower.

DEFENSE

Religare’s lawyers said the petition filed by Ligare was not maintainable under Section 7 of IBC as the company is a financial service provider and is excluded from the definition of “corporate person” as defined under Section 3(7) of IBC. Therefore, the insolvency proceedings cannot be initiated against the company, they contended.

To support their contention, the lawyers also presented the BSE and NSE-listed Religare’s Certificate of Registration under the Reserve Bank of India Act 1934, giving the company the status of “Non-Banking Financial Institution.”

The lawyers also said the Reserve Bank of India (RBI) alone is entitled to initiate CIRP against all NBFCs that have an asset size of more than 500 crore rupees and no other entity/company is legally or statutorily competent to institute any petition against NBFCs.

The certificate also reveal that the RBI has itself registered Religare as core investment company (CIC), they noted.

The diversified financial services group offers an integrated suite of services through its subsidiaries and operating entities, including loans to SMEs, Affordable housing finance, health insurance and retail broking. according to its website.

REBUTTAL

Ligare’s legal team said Religare is not a financial service provider and had not furnished any document to prove that it falls under the exclusion clause of Section 3(7) of IBC.

They also said the company’s annual report for the financial year ended 31 March 2015 shows that its status changed in 2014 from NBFC to CIC.

The lawyers further argued that the direction issued by the RBI by which Religare changed its status clearly states that CIC justifiably deserve a differential treatment in the regulatory prescription applicable to NBFCs and further CIC are those companies, which have their assets as investment in shares for holding stake in group companies, but not trading and they do not carry on any other financial activity.

OBSERVATIONS

The NCLT said the RBI granted a certificate to Religare to carry on business of non-banking financial institution, subject to the conditions. It considered whether Religare can claim exemption on the basis of the certificate.

The tribunal noted that as per Section 3(7) of IBC, "corporate person" means:

(a) a company as defined in clause (20) of Section 2 of the Companies Act 2013,

(b) a limited liability partnership, as defined in clause (n) of sub-section (1) of Section 2 of the Limited Liability Partnership Act 2008, or

(c) any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider.

The NCLT also said Sec 3(8) of IBC defines a “corporate debtor” as a corporate person who owes a debt to any person, while Section 7 speaks of initiation of CIRP against a corporate debtor by a financial creditor.

The tribunal remarked that reading the provisions together, it is clear that a Section 7 petition may be initiated against any corporate debtor who is a corporate person within the meaning of Section 3(7) of IBC and the financial service provider is excluded from the definition of the corporate person.

Therefore, Religare herein is not covered within the definition of Section 3(7) of IBC, since it is admittedly an NBFC, it noted.

The NCLT also cited the examples of the decisions taken by the authorities in the matter of Housing Development Finance Corporation Ltd. versus RHC Holding Private Ltd. and Randhiraj Thakur versus Jindal Saxena Financial Services Private Ltd. to support its observations.

VERDICT

“We are of the considered view that the corporate debtor as alleged do not come within the meaning of corporate person and therefore, we are unable to accept the prayer of the applicant to initiate the CIRP against the corporate debtor,” the tribunal said.

In these circumstances, Ligare’s petition is not maintainable and accordingly dismissed, it added.

The NCLT, however, said the dismissal of the petition is not on merit, but only because the Section 7 application is not maintainable against the corporate debtor.

“This order shall, therefore, not prejudice the right of the financial creditor to initiate appropriate steps under any other law and before appropriate forum,” it noted.

Ligare was represented by Senior Advocate Sudhir Makkar, advocates Zeyaul Haque and Sweta Singh, while advocates Sunil Fernandis, Siddharth Sharma, Varun Chopra and Diksha Dadu appeared on behalf of Religare.

Note: $ 1 = 82.1355 Indian rupees

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