Shuchi Agrawal, & Tejaswini Tripathy
[ALA LEGAL, ADVOCATES]

Within three years of its inception, the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “Code”), has proven to become one of the most successful economic reforms in the Country with regard to resolution of stressed assets. The enactment of the Code has led to a greater stability in financial systems, being fundamental to economic growth and wealth creation. A consolidated and institutionalised framework, uniquely designed for an early recognition of debt in a time bound manner has immensely aided the proper management of bad assets in the economy, with the motto of restructuration of the entity as a going concern rather than pushing into liquidation.

Applicability of the code:

Although the Code contains provisions in relation to Corporate Insolvency Resolution for companies, partnership firms, LLPs and individuals. But however, the insolvency resolution mechanisms for corporate persons contained in Part II of the Code, are notified and are made effective till date, and the other Parts dealing with insolvency resolution of individuals and partnerships are remaining to be unravelled.

Likewise, the Code also contains an enabling provision under Section 227 wherein the insolvency and liquidation process of Financial Service Providers (FSPs) can be initiated. But until 14.11.2019, no FSPs were notified and no mechanism or procedure was provided under the Code in this regard.

Considering the challenges and tussles faced by FSPs, creditors and customers and in the absence of a dedicated legislation dealing with insolvency liquidation of FSPs, the Central Government has issued two Notifications dated 15th November, 2019 and 18th November, 2019, duly empowered under Section 227 of the Code. The contents, details and impact of the aforesaid Notifications are discussed below.

Proposed bill for resolution of FSPs:

Realizing the vital role of a viable and solvent financial institution, Financial Resolution and Deposit Insurance (FRDI) Bill was tabled in the Lok Sabha on 10 August 2018 specifically for the purposes of resolution of the financial institutions (including NBFCs). It is expected that the enactment of such law will pave the way for a comprehensive resolution framework for specified financial sector entities like insurance companies, asset management companies, Non-banking finance companies, cooperative banks, pension funds, scheduled commercial banks, etc,.

But, the Bill invited major objections. To name a few, the country’s financial sector is itself multi-faceted and there are multiple laws and regulators with regard to the financial sector. For instance, the Reserve Bank of India (RBI) is the regulator for banks, and Insurance Regulatory and Development Authority of India (IRDAI) for insurance companies. The existence of multiple forums and authorities for adjudication and with the requisite expertise, causes a major hindrance in formulating a common consolidated law with regard to the same. Also, there are different legislations for similar entities. For instance, the Banking Regulation Act, 1949 governs the resolution of banks as a whole, but then there specific legislations which deal with scheduled commercial banks or financial firms that have been created or acquired by statute, like the State Bank of India Act, 1955.

Even said so, several other loopholes including the aforesaid were spotted in the draft Bill and therefore, it was dropped and was never passed. Further, the Bill is still under consideration and is expected to be placed before the winter session of the Parliament this year.

Recent amendment to cover FSPs under the code:

For the time being, as an interim measure the Central Government has vide its amendment dated 15th November, 2019 and 18th November, 2019 has brought into force Section 227 of the Code wherein Insolvency and liquidation can be initiated against notified FSPs. This enactment serves as an interim mechanism and continues till a comprehensive framework for insolvency resolution for financial institutions is enacted.

Section 227 of the Code provides for a non-obstante clause, wherein the Central Government has power to notify the FSPs or category of FSPs for the purpose of the their insolvency and liquidation proceeding which may be conducted under the provisions of the Code. The aforesaid Section is extracted as follows:

“Notwithstanding anything to the contrary examined in this Code or any other law for the time being in force, the Central Government may, if it considers necessary, in consultation with the appropriate financial sector regulators, notify financial service providers or categories of financial service providers for the purpose of their insolvency and liquidation proceedings, which may be conducted under this Code, in such manner as may be prescribed.”

Further, under Section 227 read with Section 239 (zk) of the Code, the Central Government is also empowered to make Rules in this regard. The Ministry of Corporate Affairs (MCA) under the exercise of powers conferred under Section 227 of the Code has brought in a Notification dated 18th November, 2019. The Notification empowers the appropriate regulator for initiation of insolvency resolution and liquidation for Non-banking finance companies (which include housing finance companies) with asset size of Rs.500 crore or more, as per last audited balance sheet, by the appropriate regulator i.e. the Reserve Bank of India (RBI).[1]

Sl. No. Category of Financial Service Provider (rule 2 of the Rules) Appropriate Regulator [clause (a) of sub-rule (1) of rule 3 of the Rules] Dealing with third-party assets (rule 10 of the Rules)
(1) (2) (3) (5)
1 Non-banking finance companies (which include housing finance companies) with asset size of Rs.500 crore or more, as per last audited balance sheet. Reserve Bank of India To be notified separately

The Central Government vide Notification dated 15th November, 2019 has notified the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 (hereinafter referred to as “Rules”) to provide a generic framework for insolvency and liquidation proceedings of systemically important Financial Service Providers (FSPs). These rules provide a complete mechanism for the insolvency resolution and liquidation of FSPs that has been and will be notified under Section 227 of the Code.

The Rules provide that the provisions of the Code relating to the Corporate Insolvency Resolution Process (CIRP), Liquidation Process and Voluntary Liquidation Process for a corporate debtor shall, mutatis mutandis, apply to a process for an FSP, subject to modifications, as under:

a. The insolvency resolution of an FSP shall be initiated only on an application by the appropriate regulator.

b. On admission of the application, the Adjudicating Authority shall appoint the individual, who has been proposed by the appropriate regulator in the application for initiation of insolvency resolution, as the Administrator.

c. While conducting a proceeding of an FSP, the Administrator shall have the same duties, functions, obligations, responsibilities, rights, and powers of an insolvency professional, interim resolution professional, resolution professional or liquidator, as the case may be. He shall be appointed or replaced by the Adjudicating Authority on an application made by the appropriate regulator in this behalf.

d. The appropriate regulator may constitute an Advisory Committee of three or more experts to advise the Administrator in the operations of the FSP during the process of insolvency resolution.

e. An interim moratorium shall commence on and from the date of filing of the application for initiation of insolvency resolution by the appropriate regulator till its admission or rejection by the Adjudicating Authority.

f. The provisions of interim-moratorium or moratorium shall not apply to any third-party assets or properties in custody or possession of the FSP, including any funds, securities and other assets required to be held in trust for the benefit of third parties.

g. The Administrator shall take control and custody of third-party assets or properties in custody or possession of the FSP and deal with them in the manner, to be notified by the Central Government under section 227.

h. The license or registration which authorises the FSP to engage in the business of providing financial services shall not be suspended or cancelled during the interim-moratorium and the process of insolvency resolution.

WAY FORWARD:

By virtue of these notifications, an interim mechanism has been brought in the Code in terms of which the insolvency resolution and liquidation can be initiated against the notified FSPs and the procedure for initiation has been notified by way of rules. The introduction of insolvency and liquidation of FSPs under the Code is aimed at serving as temporary function of dealing with the insolvency and liquidation of systematically important FSPs until a full-fledged framework is enacted in this regard.

This is a prompt step towards timely recognition and viability assessment of the distressed systemically important FSPs. Having regard to the objective of the said enactment, this will aid in permitting interplay between regulators, creditors and the NCLT (National Company Law Tribunal) for appropriate actions.

[1] https://taxguru.in/corporate-law/notification-categories-financial-service-providers.html

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