Introduction
Excepting the spate of neoteric amendments to the Insolvency and Bankruptcy Code, 2016 (IBC), the central government on 15th November, 2019 notified the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 (Rules).[i]
The Rules subject the Financial Service Providers (FSP) to the process of Corporate Insolvency Resolution (CIRP) under the IBC. Intrinsically, FSP includes persons engaged in the business of providing financial services in terms of authorisation issued or registration granted by a financial sector regulator. Such regulators include the Reserve Bank of India, the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority of India, the Pension Fund Regulatory Authority and such other regulatory authorities as may be notified by the Central Government.
The Rules were notified by the Central Government under Section 227 of the IBC, which permitted the Government to notify FSP for the purpose of their insolvency and liquidation proceedings. In pursuance of the same, the Central Government brought in Non-banking finance companies with asset size of Rs. 500 crore or more under the ambit of the above.[ii] Thus, the Rules will unswervingly apply to FSP that are brought in under the section.
Initiation of Corporate Insolvency Resolution Process against FSP
For the initiation of CIRP against FSP, an application has to be made by the appropriate regulator. The appropriate regulator would mean the financial sector regulator, as notified by the Central Government.
The Rules distinctively provide for the concept of “Administrator”, who is an individual appointed by the National Company Law Tribunal (NCLT) to exercise the powers and functions of the insolvency professional, interim resolution professional, resolution professional or the liquidator for the purpose of insolvency and liquidation proceedings of FSP.[iii] Therefore, for the purpose of insolvency proceedings, in crux, the Administrator acts as the resolution professional. The appropriate regulator is required to propose an individual to be appointed as the Administrator, who is then appointed as the same.
Interim Moratorium to Commence from Date of Filing Application
Under the purview of the IBC, the NCLT declares the moratorium by an order. The order of moratorium shall have effect from the date of such order till the completion of the CIRP. The Rules, however, it can be comprehended, provide for an interim moratorium which shall commence on and from the date of filing of the application till its admission or rejection.[iv] The license or registration which authorises FSP to engage in the business of providing financial services shall not be suspended or cancelled during the interim moratorium and the CIRP.
Conspicuously, the moratorium shall not apply to any third-party assets or properties in custody or possession of FSP, including any funds, securities and other assets required to be held in trust for the benefit of third parties. The Administrator shall take control and custody of third-party assets or properties in custody or possession of FSP, for the purpose of dealing with them in the manner, as may be notified by the Central Government under section 227.
Advisory Committee
The Rules markedly provide for the formation of an “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 FSP during the CIRP.[v] It shall consist of three members who shall be persons of ability, integrity and standing. The Rules underscore the requisite for members to 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 FSP.
The terms and conditions of the Advisory Committee and the manner of conducting meetings and observance of rules of procedure shall be as established by the appropriate regulator. Compensation to the members shall be part of the insolvency resolution process cost, and all meetings of the Advisory Committee shall be chaired by the Administrator.
Resolution Plan
Further pertinent, is the resolution plan, which shall be required to contain a statement including the modus or fashion through which the resolution applicant satisfies or intends to satisfy the requirements of engaging in the business of FSP, as per laws for the time being in force.[vi] The IBC under Section 30(4) provides that the committee of creditors may approve a resolution plan by a vote of not less than sixty six per cent. of voting share of the financial creditors. Upon such approval, the Administrator under the Rules, shall seek ‘no objection’ of 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 resolution plan, and where an appropriate regulator does not refuse ‘no objection’ on an application made within forty-five working days of receipt of such application, it shall be deemed that ‘no objection’ has been granted.
The IBC under Section 29(A) provides certain conditions under which a person is ineligible to submit a resolution plan including: if a person is an undischarged insolvent; is a wilful defaulter in accordance with Reserve Bank of India (RBI) guidelines; at the at the time of submission of the resolution plan has an account, or an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as non-performing asset and at least year has lapsed from the date of such classification till the date of commencement of the CIRP of the corporate debtor.
The appropriate regulator shall under the Rules without prejudice to the above mentioned conditions, issue ‘no objection’ on the basis of the ‘fit and proper’ criteria applicable to the business of FSP.
Liquidation
With respect to liquidation, the provisions of IBC concerning the liquidation process of the corporate debtor shall, mutatis mutandis apply, to the liquidation process of FSP subject to a few modifications.[vii] Predominantly, an opportunity of being heard has to be provided to the liquidator prior to suspending or cancelling the license or registration authorising FSP to engage in the business of providing financial services.
For the purposes of voluntary liquidation, the FSP is required to obtain prior acquiescence of the appropriate regulator for initiation of such proceedings under the IBC.
Initiation of CIRP against Dewan Housing Finance Corporation Limited
The Non-Banking Financial Company (NBFC) sector has of late, been subject to severe scrutiny on account of defaults in repayment. The RBI on 20th November, 2019 superseded the Board of Directors of Dewan Housing Finance Corporation Limited (DHFL) owing to governance concerns and defaults by DHFL in meeting various payment obligations.[viii]
It will initiate CIRP against DHFL under the Rules. DHFL has a staggering debt of INR 80,000 crore, including loans from commercial banks.[ix] The initiation of such proceedings will consequently bring an exultant reprieve to the creditors.
Insolvency Process against Aviva Life Insurance
The NCLT via its order[x] dated 4th November, 2019 in the matter of Apeejay Trust v. Aviva Life Insurance Company India Limited even prior to the notification of the Rules, permitted insolvency proceedings to be initiated against Aviva. The counsel for Aviva, raised the argument that such proceedings were not maintainable against Aviva on account of it coming under the scope of FSP. In response it was contended by Apeejay, that the “bar is only operative for such institutions as defined under IBC”.
The NCLT in consonance with the argumentation propagated by Apeejay, held that the definition of financial services under IBC, included transactions effecting contract of insurance, and the claims made by Apeejay did not fall under the same. Therefore, the NCLT concurred that the blanket exception of FSP could not be availed by Aviva.
Remarkably, on 27th November, 2019, Aviva released a statement intimating that the dispute regarding the insolvency matter had been settled.[xi] Nonetheless, the order provides a unique insight into the NCLT’s reasoning of permitting insolvency proceedings on the basis of the nature of the debt, rather than principally the nature of the entity.
Conclusion
In particular, the creditors of FSP will reassuringly be at an advantageous position. The Rules add yet another feather to the burgeoning extent of the IBC. Undoubtedly, since the inception of the IBC, the lucid intent of the legislators has been implicit through the provisions of section 227, and the Rules exemplify that intention.
The RBI’s affirmation of the same, with regard to the initiation of CIRP against DHFL may be instrumental in assuaging trepidation regarding defaults. It is yet to be seen, which other categories of FSP will be notified, but from a holistic perspective, the process appears to be encouragingly clear-cut.
[i] Rules, available at https://ibbi.gov.in//uploads/legalframwork/cb1d53c7fe47f8f22ab36a40f441db2c.pdf.
[ii] MCA Notification S.O. 4139(E), available at https://www.mca.gov.in/Ministry/pdf/NotificationFSPs_18112019.pdf.
[iii] 3(a) of Rules.
[iv] 5(b)(i) of Rules.
[v] 5(c)(i) of Rules.
[vi] 5(d)(i) of Rules.
[vii] 7 of Rules.
[viii] RBI Press Release: 2019-2020/1230, available at https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=48684.
[ix] DHFL defaults on ₹1,570.6 cr. NCDs, CP, available at https://www.thehindu.com/business/dhfl-defaults-on-15706-cr-ncds-cp/article29161183.ece.
[x] Apeejay Trust v. Aviva Life Insurance Company India Limited, available at https://ibbi.gov.in/uploads/order/885b648aa53e06bc8061a68846666f9c.pdf.
[xi] Aviva Life settles Apeejay Trust’s Rs 27-lakh insolvency case in NCLT, available at https://www.business-standard.com/article/pti-stories/aviva-life-settles-insolvency-case-in-nclt-119112701037_1.html.
This article is written by Amogh Sharma of HNLU Raipur.
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