The National Company Law Appellate Tribunal (NCLAT) has rejected Equitas Small Finance Bank 's appeal to initiate insolvency proceedings against Jumbo Finvest, upholding the National Company Law Tribunal's (NCLT) earlier decision. The ruling reinforces the special protections afforded to Financial Service Providers under the Insolvency & Bankruptcy Code (IBC).

NCLT's Initial Ruling

The Jaipur Bench of NCLT had initially rejected the insolvency plea against Jumbo Finvest, determining that the company qualifies as a Financial Service Provider within the meaning of Section 3(17) of the Insolvency & Bankruptcy Code. The tribunal ruled that Jumbo Finvest is not a corporate person against whom a Section 7 application can be initiated under standard insolvency procedures.

Equitas Bank's Challenge

Equitas Small Finance Bank challenged this decision before NCLAT, arguing that Jumbo Finvest's status had fundamentally changed following regulatory action. The bank highlighted that RBI had imposed significant restrictions on Jumbo Finvest on January 16, 2020, including prohibition from increasing balance sheet size, ban on accessing public funds in any form, and restriction on lending activities. Equitas contended that these restrictions meant Jumbo Finvest was no longer functioning as a financial service provider, and therefore should not receive the protections envisaged under the IBC provisions.

NCLAT's Decision

The two-member NCLAT bench, comprising Justice Ashok Bhushan and Member (Technical) Barun Mitra, rejected Equitas Bank's arguments. The tribunal stated: "We are not persuaded to accept the submission that in view of the order of prohibition issued by RBI, the Respondent (Jumbo Finvest) shall lose its character and nature of the financial service provider."

NCLAT observed that Jumbo Finvest's registration was cancelled on October 14, noting that it remained a registered financial service provider until the date the registration was cancelled.

Special Provisions for Financial Service Providers

The ruling highlights the distinct treatment of Financial Service Providers under the IBC framework. FSPs, including NBFCs, banks, and insurers, were initially excluded from standard Corporate Insolvency Resolution Process (CIRP) procedures but were later brought under special provisions through notifications and rules, including the FSP Rules, 2019.

Under current regulations, CIRP against FSPs typically requires application by relevant regulators like RBI rather than creditors, regulator approval for resolution plans, compliance with public interest considerations, and adherence to fit-and-proper management standards.

Implications and Available Remedies

NCLAT clarified that while rejecting the Section 7 application, this decision does not preclude Equitas Small Finance Bank from pursuing other legal remedies available under law regarding its dues against Jumbo Finvest. The tribunal emphasized: "We do not find any error in the order of the Adjudicating Authority rejecting the section 7 application."

The ruling reinforces the regulatory framework's intention to maintain specialized insolvency procedures for financial institutions, ensuring that systemic considerations and regulatory oversight remain paramount in resolution processes involving FSPs.