INSOLVENCY PROCEEDINGS COMMENCED UNDER THE IBC AGAINST A FINANCIAL SERVICE PROVIDER
The National Company Law Tribunal, New Delhi Bench (NCLT) recently clarified the law on maintainability of an insolvency petition filed against a prominent insurance company on the ground of non-payment of license fee and service tax to the licensor in the case of Apeejay Trust v. Aviva Life Insurance Company India Ltd.
NCLT held that even though the insurance company is running its business as a financial service provider, it cannot be said to be providing financial services to its lessee in terms of paying license fees and admitted the insolvency petition to commence the Corporate Insolvency Resolution Process (CIRP) against the insurance company. NCLT also appointed an Interim Resolution Professional (IRP) for the insurance company. This update briefly summarises the decision of NCLT.
Facts of the Case:
The operational creditor, Apeejay Trust (Apeejay), entered into a leave and license agreement with the corporate debtor, Aviva Life Insurance Company India Limited (Aviva) for its office premises located at Mumbai. Aviva had failed to pay license fees, car parking, maintenance/ service charge and service tax, despite repeated requests from Apeejay, who was the licensor of the premises. The total default amount was Rs 27,67,203/-(Rupees Twenty Seven Lakhs Sixty Seven Thousand Two Hundred and Three only). Apeejay filed a petition before NCLT under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) to commence CIRP against Aviva.
Aviva raised a preliminary issue of maintainability of the petition, since Aviva is a financial service provider and there is a bar on initiating proceedings against a financial service provider under the IBC for financial services rendered by it.
Contention of Aviva:
Aviva contended that by reason of being an insurance company, it would be considered a “financial service provider” (as defined under Section 3(17) of IBC). Thus, its business was to be controlled by the “financial sector regulator” (as defined under Section 3(18) of IBC) and therefore, there was an absolute bar on initiation of proceeding against it, under IBC. An analogy of banks was given. It was argued that as much as no proceedings under IBC can be filed against the banks, no proceedings can be initiated against the insurance company which is a financial service provider. Therefore, the petition is not maintainable.
Response of Apeejay:
Apeejay responded stating that the contention of Aviva is fallacious because Sections 3(17) and 3(18) of IBC must be construed in light of Section 3(16) which defines “financial services”. Even if Aviva is running a business in financial services, as regards Apeejay, it was only a licensee. It was argued that Aviva had not provided any insurance cover or financial assistance to Apeejay. Therefore, qua Apeejay, Aviva could not be considered as a financial service provider. Therefore, the petition was maintainable.
NCLT accepted the argument of Apeejay and held that “the definition of financial service under Section 3(16) of the Code clearly includes the transactions effecting contract of insurance. However, the operational creditor does not have any claim in respect of contract of insurance. The claim is with respect to the outstanding license fees and service tax amounts. Hence the corporate debtor cannot use the provisions of Section 3 of IBC as a blanket cover to claim exclusion from IBC proceedings on the ground that it is a financial service provider”. Therefore the petition was admitted and CIRP commenced with the appointment of the IRP by the NCLT.
Aviva is a prominent company in the business of life insurance. Initiation of CIRP and appointment of IRP is expected to have serious ramifications on Aviva since its board of directors will now be superseded. The reasoning of NCLT seems sound with a significant impact on defaulting financial service providers where the default does not relate to the service that they provide. As the default amount is not significant, Aviva may settle the dues or challenge the order before NCLAT. If it is appealed by Aviva, it remains to be seen whether NCLAT (and may be the Supreme Court) concurs with this decision.
This update was released on 16 Nov 2019.
Legal Update Team
MANSUKHLAL HIRALAL & COMPANY
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