INSOLVENCY AND LIQUIDATION PROCEEDINGS OF FINANCIAL SERVICE PROVIDERS

Financial Service Provider

The expression ‘financial service provider’ is defined under Section 3(17) of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) as a person engaged in the business of providing financial services in terms of authorisation issued or registration granted by a financial sector regulator.

Financial Service

The expression ‘Financial Service’ is defined under Section 3(16) of the Code as including any of the following services-

• accepting of deposits;
• safeguarding and administering assets consisting of financial products, belonging to another person, or agreeing to do so;
• effecting contracts of insurance;
• offering, managing or agreeing to manage assets consisting of financial products belonging to another person;
• rendering or agreeing, for consideration, to render advice on or soliciting for the purposes of-

• buying, selling, or subscribing to, a financial product;
• availing a financial service; or
• exercising any right associated with a financial product or financial service;

• establishing or operating an investment scheme;
• maintaining or transferring records of ownership of a financial product;
• underwriting the issuance or subscription of a financial product; or
• selling, providing, or issuing stored value or payment instruments or providing payment services.

Rules

Section 227 of the Code gives powers to the Central Government, in consultation with the regulators, to notify financial service providers or categories of financial service providers for the purpose of their insolvency and liquidation proceedings under the Code. Vide Notification No. S.O. 4139 (E), dated 18.11.2019 notified Non-banking finance companies (which include housing finance companies) with asset size of Rs.500 crore or more, as per last audited balance sheet as category of financial service providers. The Regulator for this financial service providers is the Reserve Bank of India.

The Central Government, in order to carry out the provisions relating to Financial Service Providers framed a rule known as ‘Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 (‘Rule’ and these rules came into effect from 18.11.2019.

Administrator

The term ‘Administrator’ is defined under Rule 3 as an individual appointed by the Adjudicating Authority under sub-clause (iii) of clause (a) of rule 5, 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 a financial service provider.

Applicability of Rules

 These rules shall apply to such financial service providers or categories of financial service providers, as may be notified by the Central Government under section 227, from time to time, for the purpose of their insolvency and liquidation proceedings under these rules.

Modifications

The expression ‘Corporate Debtor’ appears in the Code shall mean the Financial Service Provider for the purposes of these rules. Likewise the expressions ‘insolvency professional’, ‘interim resolution professional’, ‘resolution professional’ or ‘liquidator’, wherever they occur, shall mean ‘administrator’.

CIRP of Financial Service Providers

The provisions of the Code relating to the corporate insolvency resolution process (‘CIRP’ for short) shall be applicable to the insolvency resolution process of the financial service providers subject to the following modifications-

1. initiation of CIRP

• If a financial service provider committed a default, the regulator only can initiate insolvency resolution process against the financial service provider.
• The application filed by the regulator shall be processed as that of Section 7 of the Code.
• The Regulator shall in the application prose the name of the insolvency professional as an Administrator.

2. Moratorium

• Once the application is filed by the Regulator there shall be imposed an interim moratorium which will be in live until the application is admitted or rejected by the Adjudicating Authority.
• The license or registration which authorises the financial service provider to engage in the business of providing financial services shall not be suspended or cancelled during the interim-moratorium and the corporate insolvency resolution process.
• The ‘interim moratorium’ shall have the effect of the provisions of sub-sections (1), (2) and (3) of section 14.

3. Advisory Committee

• The regulator may, where deemed necessary, constitute an Advisory Committee, within 45 days of the insolvency commencement date, to advise the Administrator in the operations of the financial service provider during the corporate insolvency resolution process.
• The Advisory Committee shall consist of 3 or more Members, having the 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 a 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 shall be such as may be determined by the regulator.
• The compensation paid to the Members of the Advisory Committee shall be part of the insolvency resolution process costs.
• The Administrator shall be the chairman of the meetings of the Advisory Committee.

4. Resolution plan

• The resolution plan shall include a 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 section 30 (4), the Administrator 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 the financial service provider after approval of the resolution plan.
• The appropriate regulator shall 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.
• If the regulator does not refuse ‘no objection’ on an application within 4 working days of receipt of such application, it shall be deemed that ‘no objection’ has been granted.

Filing of form

The application shall be filed in Form 1 along with a fee of Rs.25000/- along with the required copy of documents. The consent of the proposed Administrator shall be enclosed along with the application in Form 2. The application shall be filed in electronic form. The applicant shall dispatch forthwith, a copy of the application filed with the Adjudicating Authority, by speed post to the registered office of the financial service provider.

Withdrawal of application

The Adjudicating Authority may permit the withdrawal of the application before its admission on a request made by the applicant.

Liquidation process

The provisions of the liquidation contained in the Code shall be applicable to the liquidation of Financial Service provider subject to the following modifications-

• The license or registration authorising the financial service provider to engage in the business of providing financial services shall not be suspended or cancelled during the liquidation process, unless an opportunity of being heard has been provided to the liquidator.
• The Adjudicating Authority shall provide an opportunity to the Regulator before passing the order of liquidation or dissolution of the Financial Service Provider.

Voluntary liquidation

The provisions for the voluntary liquidation contained in the Code shall be applicable to the liquidation of Financial Service provider subject to the following modifications-

• The financial service provider shall obtain prior permission of the appropriate regulator for initiating voluntary liquidation proceedings.
• The affidavit referred to in section 59 (3)(a) shall include a declaration that the permission under clause (a) has been obtained.
• The Adjudicating Authority shall provide the regulator an opportunity of being heard before passing an order for dissolution of the financial service provider.

Insolvency Professional

An Administrator shall have the same duties, functions, obligations, responsibilities, rights, and 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 proceeding of a financial service provider. The appointment or re-appointment of an administrator shall be made by the Adjudicating Authority on the filing of an application by the Regulator.

Asset of the third parties

The provisions of rule 5 (b) and section 14 shall not apply to any third-party assets or properties in 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 shall take control and custody of third-party assets or properties in 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 only for the purpose of dealing with them in the manner, as may be notified by the Central Government under section 227.