INSOLVENCY RESOLUTION OF FINANCIAL SERVICE PROVIDERS UNDER INSOLVENCY AND BANKRUPTCY CODE, 2016

Section 3 (18) defines “Financial Service Provider” as a person engaged in the business of providing financial services in terms of authorization issued or registration granted by a Financial Sector Regulator.

Financial Service Providers have been excluded from the definition of the Corporate Person as such Corporate Insolvency Resolution Process cannot be initiated against Financial Service Providers. There have been efforts to develop separate framework for handling insolvency and liquidation of the Financial Service Providers, but such efforts have not as yet fructified.

Section 227 of the Code empowers the Central Government in consultation with appropriate Financial Sector Regulator to notify Financial Service Providers or category of Financial Sector Providers for the purpose of their Insolvency and Liquidation Proceedings, which may be conducted under this Code.

The Central Government issued Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 on 15^th November, 2019.  These rules are applicable to such Financial Services Providers or category of Financial Services Providers as may be notified by the Central Government under Section 227 from time to time.

NOTIFICATION OF THE CENTRAL GOVERNMENT

The Central Government issued notification with consultation of the Reserve Bank of India on 18^th November, 2019, whereby the  Non-Banking Finance Companies (including Housing Finance Companies )  with asset size of 500 crore or more  as per last audited balance sheet has been included, of which Resolution and Liquidation Proceedings can be undertaken as per provisions of Insolvency and Bankruptcy Code, 2016  R/w Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019.

APPLICABILITY OF CIRP PROVISIONS

The CIRP provisions mutatis mutandis applies to the Insolvency Resolution Process of the Financial Service Providers.  There are some modifications to CIRP process, which apply to Financial Service Providers, which are as under:

Initiation of CIRP

• Only appropriate Regulator can file application for initiation of Insolvency Proceedings of Financial Service Provider
• Such application is dealt with in the same manner as an application filed by the Financial Creditor
• On the admission of the application, the Adjudicating Authority appoints the individual proposed by the appropriate Regulator as the Administrator

Interim Moratorium

• Interim Moratorium commences on and from the date of filing of the application till admission or rejection
• The license or registration which authorises the Financial Service Provider to engage in the business of providing financial services cannot be suspended or cancelled during the Interim Moratorium and the CIRP.

Advisory Committee

• The appropriate Regulator may constitute an Advisory Committee within 45 days of the insolvency commencement date to advise the Administrator in the operations of the financial services provider during the CIRP.
• The Advisory Committee consists of three or more members who will be person 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 Financial Service Provider.
• The terms and conditions of the members of the Advisory Committee and the manner of conducting meetings and observance of rules of procedure will be such as may be determined by the appropriate Regulator.
• The compensation paid to the members of the Advisory Committee will be part of the Insolvency Resolution Process Costs
• The Administrator will chair the meeting of the Advisory Committee

Resolution Plan

• The Resolution Plan has to include the statement explaining how the Resolution Applicant satisfies or intends to satisfy the requirements of engaging in the business of the Financial Service Provider as per laws for the time being in force.
• Upon approval of the Resolution Plan by the Committee of Creditors under sub-section (4) of Section 30, the Administrator has to seek “no objection” to the persons who would be in control or management of the Financial Service Provider after approval of the Resolution Plan under Section 31
• The appropriate Regulator without prejudice to the provisions contained in Section 29A, issue no objection on the basis of the ‘fit and proper’ criteria applicable to the business of the Financial Service Provider.
• Where an appropriate Regulator does not refuse “no objection” on an application made under clause (ii) within 45 working days of receipt of such application, it will be deemed that ‘no objection’ has been granted.

APPLICABILITY OF LIQUDIATION PROCEEDINGS

The provisions of the Code relating to Liquidation Proceedings mutatis mutandis apply to the Liquidation of Financial Service Providers with following modifications:

The license or registration that authorises the Financial Service Provider to engage in the business of providing financial services will not be suspended or cancelled during the Liquidation Process unless an opportunity of being heard has been provided to the Liquidator.

The Adjudicating Authority has to provide the appropriate Regulator an opportunity of being heard before passing an order for liquidation of the Financial Service Provider under Section 33 and dissolution of Financial Service Provider under Section 54.

VOLUNTARY LIQUIDATION

The provision of the Code relating to Voluntary Liquidation Process of a Corporate Debtor mutatis mutandis apply to the Voluntary Liquidation Process of a Financial Service Provider subject or following modification:

• The Financial Service Provider will obtain prior permission of the appropriate Regulator for initiating Voluntary Liquidation Proceedings under Section 59 of the Code
• The declaration will include that the permission from appropriate Regulator has been obtained
• The Adjudicating Authority will provide the appropriate Regulator an opportunity of being heard before passing an order for dissolution of the Financial Service Provider under Section 59.

ADMINISTRATOR

Only an Administrator proposed by the appropriate Regulator   and appointed by the Adjudicating Authority has to act as an Insolvency Professional, Interim Resolution Professional, Resolution Professional or Liquidator, as the case may be.

An administrator will have the same duties, functions, obligations, responsibilities, rights, powers of an Insolvency Professional, Interim Resolution Professional, Resolution Professional or Liquidator, as the case may be, while acting as such in an insolvency resolution and Liquidation Proceedings of a Financial Service Provider.

The appointment or replacement of the Administrator may be made by the Adjudicating Authority on an application made by the appropriate Regulator in this behalf.

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