Introduction
Under the Insolvency and Bankruptcy Code, 2016 (IBC), the corporate insolvency resolution process contained in Part II applies to corporate debtors. A corporate debtor is defined as a "corporate person who owes a debt to any person." Corporate person is defined to exclude financial service providers. A financial service provider is a person engaged in the business of providing financial services in terms of an authorisation granted by, or registration with, a financial sector regulator who is an entity constituted under any law in force to regulate services or transactions in the financial sector.
Under the Insolvency and Bankruptcy Code, 2016 (IBC), the corporate insolvency resolution process contained in Part II applies to corporate debtors. A corporate debtor is defined as a "corporate person who owes a debt to any person." Corporate person is defined to exclude financial service providers. A financial service provider is a person engaged in the business of providing financial services in terms of an authorisation granted by, or registration with, a financial sector regulator who is an entity constituted under any law in force to regulate services or transactions in the financial sector.
Under Section 227 of the IBC, the Central Government is
empowered in consultation with the financial service regulator to
make the provisions of the IBC applicable to financial service
providers or certain categories of financial service providers. The
financial crises involving IL&FS and Dewan Housing Finance
Limited (DHFL) prompted demands to include certain
financial service providers (like housing finance companies and
other specified non-banking financial companies) under the IBC.
This led the Central Government to issue a notification dated 15
November 2019 notifying the Insolvency and Bankruptcy (Insolvency
and Liquidation Proceedings of Financial Service Providers and
Application to Adjudicating Authority) Rules, 2019
(Rules). This update summarises the salient
features of the Rules.
Salient Features of the Rules
Salient Features of the Rules
- The Rules apply to financial service providers or categories of financial service providers, as may be notified by the Central Government under Section 227 of the IBC, from time to time.
- The corporate insolvency resolution process (CIRP) has been made applicable to notified financial service providers. For CIRP to commence, an application must be made by the relevant financial sector regulator to the National Company Law Tribunal (NCLT).
- The aforesaid application must also propose the name of an "Administrator" who substitutes an insolvency professional, interim resolution professional, resolution professional or liquidator, on admission of the application, for the purpose of insolvency and liquidation proceedings of a financial service provider.
- The Rules also contemplate an Advisory Committee appointed by the financial service regulator to assist the Administrator during the insolvency process.
- A moratorium commences from the date of filing the application till its admission or rejection by NCLT. The license or registration granted to the financial service provider continues in force throughout the CIRP.
- The resolution plan must contain a statement of how the resolution applicant satisfies the sectoral requirements of the financial service provider as laid down by the financial service regulator.
- Upon approval of the resolution plan by the committee of creditors, a no objection from the financial service regulator must be obtained on the persons who would take over the control and management of the financial service provider. The no objection (without prejudice to the disqualifications under Section 29-A of the IBC) must be issued by the financial service regulator based on 'fit and proper criteria' applicable to the business of the financial service provider. If the financial service regulator does not respond within 45 (forty five) days of the no objection request, the no objection is deemed to have been given.
- The provisions on liquidation including voluntary liquidation under the IBC apply mutatis mutandis to financial service providers.
- The moratorium does not apply to third party assets or properties in the custody or possession of the financial service provider including any funds, securities and other assets required to be held in trust for the benefit of third parties. The Administrator must take control of these assets and deal with them in the manner notified by the Central Government.
- The Rules also prescribe Form 1 for applying under the Rules to commence CIRP against the financial service provider by the financial sector regulator.
On 18 November 2019, the Central Government notified the
applicability of the Rules to non-banking finance companies (which
include housing finance companies) with asset size of Rs. 500 crore
or more as per the last audited balance sheet. A separate
notification will be issued on dealing with third-party assets of
such companies.
DHFL UPDATE
DHFL UPDATE
On 21 November 2019, the Reserve Bank of India
(RBI) has, under the provisions of the Reserve
Bank of India Act, 1934, superseded the Board of Directors of DHFL
owing to governance concerns and defaults by DHFL in meeting
various payment obligations and appointed Mr. R. Subramaniakumar,
ex-MD and CEO of Indian Overseas Bank as the Administrator. The RBI
also intends to commence CIRP against DHFL shortly under the Rules
with the Administrator appointed as the resolution
professional.
MHCO COMMENT
The Rules are a positive step and will help creditors of
financial service providers who are in distress recover a portion
of their debt if a suitable resolution plan is in place. This
remedy is far more suitable than the process under the relevant
laws applicable to a financial service provider since the
regulatory bodies have rarely taken steps to resolve the distress
of financial service providers who are in default. The IBC is a
pro-active legislation and with the finality granted by the Supreme
Court in the Essar Steel case, should help reduce the problems
faced by creditors in recovering debt from asset-rich corporate
debtors / financial service providers in distress.
This update was released on 28 Nov 2019.
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