Exercising its powers under Section 227 and 239 of the Insolvency and Bankruptcy Code, 2016 ("IBC"), the Ministry of Corporate Affairs ("MCA") issued the notification dated November 15, 2019 bringing into effect the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 ("FSP Rules") on insolvency process and related matters for financial service providers ("FSPs"). The insolvency proceedings of such FSPs shall be undertaken in accordance with the provisions of IBC.

In furtherance of the FSP Rules, on November 18, 2019 the MCA also notified the Reserve Bank of India ("RBI") as the appropriate financial sector regulator for the purposes of the FSP Rules for non-banking financing companies (including housing finance companies) with an asset size of Rs. 500 crore or more.

DHFL's Case

Pursuant to these notifications, the RBI swiftly moved a petition to initiate Corporate Insolvency Resolution Process ("CIRP") against Dewan Housing Finance Corporation Ltd. ("DHFL"), for default of amounts in relation to financial debt availed from various financial creditors, in particular, State Bank of India before the Mumbai bench of the National Companies Law Tribunal ("NCLT Mumbai"). This petition was admitted on December 12, 20191, and an "administrator" (whose roles and duties would be akin to an insolvency professional) was also appointed.

Being the first FSP to have been admitted into insolvency, the order of the NCLT Mumbai examines the applicability of the newly introduced provisions / notifications under which the RBI sought admission of the petition against DHFL under IBC. The NCLT Mumbai held that for admission of an application under section 7 of the IBC (now to be read with section 227) the applicant is required to establish "Debt" and "Default" under Sections 3(11) and 3(12) of the IBC. On examination, the NCLT Mumbai held that the debt of DHFL qualified as "Financial Debt" as defined under Section 5(8) read with Section 3(11) of the IBC. Further, it held that it has also been established that the FSP committed "Default" of repayment (as defined under Section 3(12) of the IBC) of the debt.

In case of FSPs, filing an application for initiation of CIRP itself triggers an "interim moratorium" under Rule 5(b)(i) of the FSP Rules. Subsequently, upon admission the "moratorium" under Section 14 of the IBC becomes applicable. This provision of a pre-admission moratorium is a welcoming step and will act as a deterrent for the FSPs to take any hurried steps to divest any assets prior to admission of the CIRP.

In light of the above, it is pertinent to note that Delhi bench of the National Law Companies Tribunal ("NCLT Delhi") in the recent decision in the matter of Aviva Life Insurance Co. India Limited2 ("Aviva Order") (that was adjudicated prior to the notification of the FSP Rules) admitted a petition under Section 9 of the IBC against Aviva Life Insurance Co. India Ltd. ("Aviva"), an insurance services provider, which would qualify as an FSP3. The petition was admitted on the ground that the it was filed for non-payment of outstanding license fees and that Aviva could not use Section 3 as a "blanket" protection to claim non-application from IBC proceedings. In our view, while the Aviva Order was adjudicated prior to the enactment of the FSP Rules, it still does not set a good tone as it would be tantamount to the NCLT Delhi going over and above the regulatory intent of the IBC.

While the FSP Rules are an ad hoc solution, their notification is welcome as it represents a step in the right direction. These are currently not applicable to all FSPs and are restricted only to "Non-Banking Financing Companies" and "Housing Finance Companies" with asset size of 500 crores or more. All in all, the initiation of the CIRP of DHFL has set the ball rolling for notified FSPs to be liable to undergo a full-fledged CIRP process. This is a welcome change considering that prior to such notification, there was no clear process for insolvency and resolution process for defaulting FSPs like DHFL.


1 Reserve Bank of India vs Deewan Housing Finance Corporation Ltd C.P. (IB)-4258/MB/2019

2 Apeejay Trust v. Aviva Life Insurance Co. India Ltd (IB-1885 (ND) 2019)

3 Under Section 3 (16) (c) of IBC

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