NBFC can now go for insolvency resolution process under IBC

Soumya Bajpai

05 Jan, 2021

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.

Insolvency Resolution Procedure

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:

• The Rules provide that the corporate insolvency resolution process has some changes for FSPs. The changes include the initiation by the appropriate regulator of the process by filing an application under Form 1, before the adjudicating authority in accordance with rules 20, 21, 22, 23, 24 and 26 of part III of the National Company Law Tribunal Rules, 2016^[1]. After admitting the application, the adjudicating authority shall appoint the liquidator.
• Then, an interim order shall commence from the date of filing such an application to ensure a period of the insolvency resolution process.
• There is a provision where the advisory committee which is constituted may also advise the liquidator. The applicant who made a resolution application shall then provide a resolution plan with the indication of satisfying the requirements of the FSPs.
• The creditors are required to give approval, and then no objection certificate shall be issued by the appropriate regulator applicable to business commenced by the financial service provider.
• The Rules have modifications which state that during the liquidation process, the FSPs license or registration shall not be suspended or canceled unless an opportunity of being heard has been provided by such liquidator.
• Lastly, the rules also provide the voluntary liquidation process where the FSPs have to obtain the prior permission of the appropriate regulator before initiating the proceedings. The adjudicating authority shall provide the applicant with an opportunity of being heard before passing an order for the dissolution of the financial service provider.

Read our article:Insolvency and Bankruptcy Code now covers NBFCs and other FSPs

Analysis of Insolvency Resolution Procedure New Rules

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.

Conclusion