Financial Service Providers Shielded from Insolvency Proceedings Without Regulator's Nod, Affirms Tribunal
In a significant ruling, the National Company Law Appellate Tribunal (NCLAT) has upheld the decision of the Jaipur Bench of the National Company Law Tribunal (NCLT) to reject the Corporate Insolvency Resolution Process (CIRP) application filed under Section 7 of the Insolvency and Bankruptcy Code (IBC) against Jumbo Finvest (India) Ltd., a financial service provider. The appeal, filed by Equitas Small Finance Bank Ltd., was dismissed by the NCLAT on December 16, 2025.
The tribunal clarified the limitations of initiating insolvency proceedings against entities classified as Financial Service Providers under the IBC. As per the provisions of Section 227 of the IBC, insolvency proceedings against Financial Service Providers can only commence upon application by the appropriate regulator, in this case, the Reserve Bank of India (RBI), in accordance with the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019.
Despite the RBI's directive prohibiting Jumbo Finvest from increasing its balance sheet size and accessing public funds due to high non-performing assets, the NCLAT found that such prohibitions do not alter the entity's status as a financial service provider. The tribunal emphasized that the protection under the IBC continues until the revocation of the registration, which was only cancelled by the RBI on October 14, 2025.
The appellant, Equitas Small Finance Bank Ltd., contended that the RBI's restrictions effectively removed Jumbo Finvest from the ambit of financial service providers, thereby subjecting it to CIRP under Section 7. However, the NCLAT rejected this argument, stating that legislative provisions clearly exclude financial service providers from the definition of corporate persons eligible for CIRP under normal circumstances.
The tribunal's decision underscores the nuanced framework governing insolvency proceedings against financial entities, reflecting the need for regulator involvement to safeguard systemic stability. This judgment serves as a reminder of the protective measures embedded within the IBC to prevent undue insolvency actions against financial entities without regulatory oversight.
Bottom Line:
Financial Service Provider - Corporate Insolvency Resolution Process (CIRP) under Section 7 of IBC cannot be initiated against a Financial Service Provider unless specifically permitted by the mechanism provided under the Insolvency and Bankruptcy Code (IBC) and rules framed under Section 227 of IBC.
Statutory provision(s): Section 3(7), Section 3(16), Section 3(17), Section 7, Section 227 of the Insolvency and Bankruptcy Code, 2016; Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019
