Company can Acquire Properties despite Cancellation of Its NBFC Registration: Kerala High Court

Ashish M. Shaji

11 Jul, 2023

The Kerala High Court made a ruling that even if an entity’s NBFC license has been stripped, it shall continue to operate as a company and a legal person as long as the certificate of registration of the company has not been canceled under Companies Act. The court ruled that if an entity is stripped of its NBFC license, it is still entitled to purchase, own and hold properties and continue its legal existence. In this article, we shall look at the ruling of the Kerala HC on- “Company can acquire properties despite cancellation of its NBFC Registration”.

Background of the case: M/s Sree Sankara Funds Ltd vs. Tahsildar (Land) & Ors

In this case, the petitioner was a Non-Banking Financial Company that was engaged in the business of advancing loans and advances. Therefore they provided a loan to two persons over immovable property. On default in payment, it became an NPA account, and proceedings under SARFAESI against the said account were initiated.

In the meanwhile, the Reserve Bank cancelled the registration of the petitioner’s NBFC as it failed to achieve the required net-owned fund within the prescribed time.

The petitioner bought the NPA property in the public auction as there was no buyer. Thereafter a sale certificate was issued. When the petitioner went for mutation, the village authorities didn’t allow to effect mutation as they said that the petitioner’s registration under Section 45-IA (6) of the RBI Act was cancelled. Further, they said that the sale deed executed afterward was without authority. Therefore the petitioner company decided to move to the court.

Court’s Observation

The court perused the relevant sections under the RBI Act, which states about cancellation of certificate of registration. As per the regulations, when the certificate of registration is cancelled under Section 45-IA (6) of the Act, the NBFC can no more operate as an NBFC, thereby disabling it from accepting deposits from the public or carrying out any other functions in the nature of banking activities.

The Hon’ble Court observed that there is difference in the certificate of registration as an NBFC and the certificate of registration as a company. Further registration as a company and registration as an NBFC fall under different and distinct statutes and a company that is registered under the Companies Act is a legal entity in itself. One of the pre-requisites of being an NBFC is it being a company at first.  When an entity becomes a company, if it has objects contemplated under the Companies Act, then it can apply for NBFC registration. The company’s existence is determined by the registration under the Companies Act, whereas the registration as an NBFC provides for the different types of activities that such a company can indulge in.

The Court observed that the petitioner’s registration under the Companies Act has not been cancelled under any provisions of law therefore when the existence of the petitioner as a company is not disputed, then it is allowed to acquire properties and can continue its legal existence. The court further held that just because the certificate of registration to function as an NBFC is cancelled, it will not deprive the petitioner of its legal existence as a company.

Therefore, it was held that the petitioner’s existence as a legal company capable of holding properties still remains intact despite it losing its registration as an NBFC. In view of this, it was held that the petitioner can hold, buy and own properties despite its registration certificate as an NBFC cancelled and accordingly, the petition was allowed.

Petitioner refrained only from acting as an NBFC due to cancellation of its NBFC Registration

The Court also held that NBFC registration cancellation during the securitization proceedings will not hamper the proceedings under SARFAESI Act

to recover amounts due. The court further ruled that due to the cancellation of the certificate of registration of NBFC, the petitioner is refrained only from acting as an NBFC.

Read our article:RBI announces Revised Regulatory Framework for NBFCs

1. https://www.indiacode.nic.in/handle/123456789/2006?sam_handle=123456789/1362