The Ministry of Corporate Affairs ("MCA") vide its press release dated November 15, 2019 has notified the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 ("Rules"). The Rules provide a framework for the insolvency and liquidation proceedings of systematically important Financial Service Providers ("FSPs") excluding banks. Section 227 of the Insolvency and Bankruptcy Code, 2016 ("Code") enables the Central Government to notify, in consultation with the financial sector regulators, FSPs or categories of FSPs for the purpose of insolvency and liquidation proceedings, in such manner as may be prescribed. The Rules, therefore, will apply to such FSPs or categories of FSPs as will be notified under Section 227 of the Code.
In furtherance to the above notification, the MCA issued a notification on November 18, 2019 with respect to the applicability of the Rules to Non-banking Finance Companies (including housing finance companies) ("NBFCs") as a class of FSPs, having asset size of Rs.500,00,00,000/- (Rupees Five Hundred Crore) or more, as per last audited balance sheet.The November 18th notification has designated the Reserve Bank of India ("RBI") as the appropriate regulator in this regard. Separately, the government will notify specific categories of FSPs that do not fall under the systemically important category and which shall be resolved under the normal provisions of the Code as ordinarily applicable to corporate debtors.1
The Rules state 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 apply, mutatis mutandis, to a process for an FSP, subject to certain modifications, as given herein below:
- The CIRP of an FSP shall be initiated only on an application by the appropriate regulator.
- On admission of the application, the adjudicating authority i.e. the National Company Law Tribunal ("NCLT") shall appoint the individual, who has been proposed by the appropriate regulator in the application for initiation of CIRP, as the administrator.
- 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.
- The appropriate regulator may within 45 days of the insolvency commencement date, constitute an advisory committee of three or more experts to advise the administrator in the operations of the FSP during the CIRP. The members of the advisory committee shall be persons of ability, integrity and standing, and who have expertise or experience in finance, economics, accountancy, law, public policy or any other profession in the area of financial services or risk management, administration, supervision or resolution of an FSP.
- An interim moratorium shall commence on and from the date of filing of the application for initiation of CIRP by the appropriate regulator till its admission or rejection by the adjudicating authority. The license or registration which authorizes the FSP to engage in the business of providing financial services shall not be suspended or cancelled during the interim-moratorium and the CIRP.
- 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.Further, 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 of the Code.2
- Resolution Plan ("Plan")
- The Plan shall include a statement explaining how the resolution applicant satisfies or intends to satisfy the requirements of engaging in the business of the FSP, as per the laws for the time being in force;
- Upon approval of the Plan by the committee of creditors, the administrator shall seek 'no objection' from the appropriate regulator to the effect that it has no objection to the persons, who would be in control or management of FSP after approval of the Plan. The appropriate regulator shall issue 'no objection' on the basis of the 'fit and proper' criteria applicable to the business of the FSP without prejudice to the provision of Section 29A of the Code; and
- Where an appropriate regulator does not refuse 'no objection' on an application made under point 7 (ii) within forty-five(45) working days of receipt of such application, it shall be deemed that 'no objection' has been granted.
- The FSP shall obtain prior permission of the appropriate regulator for initiating voluntary liquidation proceedings under Section 59 of the Code.
- The license or registration which authorizes the FSP to engage in the business of providing financial services shall not be suspended or cancelled during the liquidation process unless an opportunity of being heard has been provided to the liquidator.
- Further, the adjudicating authority shall provide the appropriate regulator an opportunity of being heard before passing an order for dissolution or liquidation of the FSP.3
There is no doubt that persisting liquidity issues in the financial sector have warranted this move of bringing players in the financial sector under the ambit of the Code. "The special framework provided under Section 227 of the Code for financial service providers is essentially aimed at serving as an interim mechanism to deal with any exigency pending introduction of a full-fledged enactment to deal with financial resolution of banks and other systemically important financial service providers,"statesInjeti Srinivas, secretary, corporate affairs, in a press statement.4
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