Information Utility Record Is Not Mandatory To Prove Debt And Default Under IBC: NCLT Hyderabad
The National Company Law Tribunal (NCLT), Hyderabad Bench of Justice Shri. Rajeev Bhardwaj (Hon'ble Member) and Shri. Sanjay Puri - Hon'ble Member Technical has held that proving debt and default through records of default with the information utility is not mandatory. If debt and default are established through other evidence, a petition under Section 7 of the IBC can still...
The National Company Law Tribunal (NCLT), Hyderabad Bench of Justice Shri. Rajeev Bhardwaj (Hon'ble Member) and Shri. Sanjay Puri - Hon'ble Member Technical has held that proving debt and default through records of default with the information utility is not mandatory. If debt and default are established through other evidence, a petition under Section 7 of the IBC can still be admitted.
The present application has been filed under section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) seeking initiation of the Corporate Insolvency Resolution Process (CIRP) against the corporate debtor due to default on commercial paper subscribed by the Applicant.
The Applicant submitted that Respondent is not a Financial Service Provider under IBC: The Respondent's registration as a stock broker with SEBI and its business of stock broking does not qualify it as a “Financial Service Provider” within the meaning of Section 3(17) of the IBC.
The Respondent submitted that the Respondent is a Financial Service Provider within the meaning of Section 3(17) of the IBC and therefore falls outside the definition of "Corporate Person" under Section 3(7) of the IBC.
The Tribunal observed that section 3(15) of the IBC defines financial products to include securities, deposits, loans and similar instruments. Section 2 of the Securities Contracts Regulation Act defines securities as shares, stocks, bonds and debentures. A stock broker company deals with these products. Therefore, the Respondent who is engaged in selling, buying and managing securities for clients registered under the SEBI provides financial services within the meaning of section 3(16) of the IBC and qualifies as a financial service provider under section 3(17) of the IBC.
It held that “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.”
It further observed that the subsequent cancellation of the license of the Respondent does not alter the position as the debt arose even before the license was cancelled and was actively engaged in stock broking. Therefore, the Respondent was providing financial services under section 3(16) of the IBC. As per the provisions of the IBC, a financial service provider is excluded from the definition of a corporate person under the IBC.
The Tribunal further held that a conjoint reading of the provisions of the IBC makes it clear that providing record of default with the Information Utility is directory, not mandatory. The word or has been used under section 7(3) of the IBC which empowers the Adjudicating Authority to prove the default either through records of an information utility or other evidence provided by the financial creditor.
It accordingly rejected the contention of the Respondent that the debt and default can only be proved by records of default with the IU.
The Tribunal further observed that the limited exception carved out in Vidharbha is not satisfied in the present case as the Respondent has failed to demonstrate that the Corporate Debtor is financially sound. However, the present petition was ultimately rejected on the ground that the Respondent is not a corporate person.
Case Title: Vardhaman Bank Vs. Karvy Stock Broking Ltd
Case Number: Company Petition IB/62/7/HDB/2023
Order Date: 05/08/2025