NBFCs and Other Financial Service Providers Now under IBC

[Ashwin Mathew and Bhushan Shah are with Mansukhlal Hiralal & Co, Mumbai] 

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 post summarises the 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 until 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

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.

Concluding Remarks

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 proactive 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. That said, the exact scope of third party assets / properties needs to be clarified and the notification in this regard from the Government is awaited.

Ashwin Mathew & Bhushan Shah

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