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Section 3(7) of the IBC 2016, (Code), has excluded the financial service providers (FSPs), which concludes that the corporate insolvency resolution process cannot be commenced against the financial services generally. Yet, by virtue of Section 227 of the IBC Code, the Central Government may by making notification provide insolvency and liquidation proceedings for the financial service providers.
Therefore, the government has implemented the Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority Rules, 2019 for the Non-Banking Financial Companies, which includes housing finance companies with asset size of Rs. 500 Crore or more as per the last audited balance sheet.
The Government has also mentioned that the specific categories of FSPs that do not fall under the systemically important category. Such FSPs shall be resolved under the normal provisions of the Code as corporate debtors, in consultation with the appropriate regulator. The Rules have provided a framework for the insolvency and liquidation proceedings of systemically important Financial Service Providers other than banks.
The liquidator or an administrator is appointed for the insolvency resolution procedure by the National Company Law Tribunal (NCLT) as per the rules. The important points to be focused on the procedure are as below:
Read our article:Insolvency and Bankruptcy Code now covers NBFCs and other FSPs
These rules have bridged the gap and taken care of FSPs during the insolvency resolution process in India. The issue is whether the definition of a ‘financial service provider’ covers its applicability in relation to the NBFCs. As NBFCs perform various other functions than taking deposits, so the moot question remains would NBFCs fall into the ambit of the definition of the financial service provider?
Secondly, the possibility that the investors of an NBFC would prefer the court-monitored IBC process rather than risking a private settlement. The courts have already being burdened with a lot more cases. Thus the government has of the view that dispute of insolvency resolution must be taken up by the IBC for the FSPs. Thirdly there might be jurisdictional issues with regard to the insolvency and bankruptcy proceedings of the financial service provider.
These rules have filled the systematic vacuum as the new rules under IBC was a timely step for resolution of financial services providers, permitting interplay between regulators, creditors and the National Company Law Tribunal (NCLT) for appropriate actions. Therefore, the introduction of these new rules which cover the FSPs under the veil of the insolvency resolution process can be seen as a milestone in the way to protect the interests of the investors at all levels of financial investment setup.
Also, Read: Insolvency and Bankruptcy Code: Simplified Version READ RBI Guidelines for Fair Practice Code of NBFCs.
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