Chit Fund Firms Are Financial Service Providers; Insolvency Plea Not Maintainable: NCLT Hyderabad

The National Company Law Tribunal (NCLT) at Hyderabad has held that chit fund companies are financial service providers under the Insolvency and Bankruptcy Code and cannot be treated as corporate debtors for insolvency proceedings.

It dismissed a plea filed by Siply Services Private Limited against IBG Echits India Private Limited.

A bench of Judicial Member Rajeev Bhardwaj and Technical Member Sanjay Puri said, “ it is evident that a company carrying on the business of chit funds is engaged in providing financial services under the regulatory supervision of a competent authority, namely the Registrar of Chits. Hence, such an entity squarely falls within the definition of a “financial service provider” under Section 3(17) of IBC. Accordingly, in view of the aforesaid findings, we are of the considered view that the present Corporate Debtor qualifies as a “financial service provider” and, therefore, does not fall within the ambit of a “corporate person” as defined under Section 3(7) of IBC, and a petition cannot be filed for initiation of corporate insolvency resolution process against the financial service provider"

Siply Services had sought insolvency proceedings over a default of about 9.52 crore. The claim arose from a loan of Rs 7.5 crore given under an inter-corporate agreement. The amount was fully disbursed. The creditor said repayment stopped after June 3, 2023 despite notices. It also relied on a November 14, 2023 letter where the company acknowledged the dues and sought restructuring.

The company opposed the plea on maintainability. It said it is a registered chit fund. It accepts deposits, manages pooled funds and disburses them. These are financial services. It argued that such entities cannot be taken to insolvency by creditors and that proceedings can be initiated only by the appropriate regulator.

The tribunal agreed. It said the chit fund business involves handling deposits and pooled funds. This makes it a financial service. It also noted that such businesses are regulated by the Registrar of Chits. On this basis, it held that the company is a financial service provider.

It said, “a petition under Section 7 cannot be filed for the initiation of CIRP against the financial service provider.” It added that insolvency proceedings against such entities can be initiated only by the appropriate regulator under the 2019 rules. The petition was dismissed as not maintainable.

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