[Varun Pandey is a student at School of Law, University of Petroleum and Energy Studies.]
The Central Government has introduced the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules 2019 (Rules), following the IL&FS collapse of 2018 and the subsequent Dewan Housing Finance Corporation Limited crisis. Notified in terms of Section 227 read with Section 239(2)(zk) of the IBC, the Rules empower the government to commence insolvency proceedings against financial service providers, albeit in consultation with the appropriate financial sector regulator as prescribed by the law.
The issue of treatment of non-banking financial companies (NBFCs) within the scope of financial service providers (FSPs) surfaced in M/s Jindal Saxena Financial Services Private Limited v. M/s Mayfair Capital Private Limited (C.P. No. (IB)-84(PB)/2017). The National Company Law Tribunal (NCLT) was of the view that just because a company is registered as an NBFC does not naturally mean that it would be treated as one and that consequently all transactions undertaken would qualify within the functional jurisdiction of FSP. However, the decision to bring NBFCs within the purview of the IBC was overturned by the National Company Law Appellate Tribunal (NCLAT) in Randhiraj Thakur v. M/s Jindal Saxena Financial Services (Company Appeal (AT) (Insolvency) Numbers 32 and 50 of 2018), wherein it was held that companies which hold the status of a non-banking financial company under the regime of the Reserve Bank of India (RBI) will not be regulated by the IBC mechanism and, instead, the RBI shall retain its adjudicatory powers in resolving NBFC related disputes. The RBI did exercise its powers when it issued the Reserve Bank of India (Prudential Framework for Stressed Assets) Directions 2019 on 7 June 2019.
Salient Features of the Rules
Set out below are some of the salient features of the Rules.
The appropriate financial regulator shall exclusively file for the CIRP proceedings under Section 6 of the IBC in accordance with National Company Law Rules 2016.
An administrator shall be appointed by the regulator once the application for insolvency is filed before it. The regulator is further authorized to replace the administrator with the adjudicating authority.
The license of operation and other activities of the concerned FSP shall not stand suspended, nor shall the FSP be prevented from carrying out its activities during the moratorium period imposed under Section 14 of the IBC.
Authorizations and functions carried out in usual CIRP proceedings by an insolvency professional would be carried out by a sole administrator.
The appropriate regulator shall seek a ‘no objection’ under Section 29A of the IBC once the resolution plan is finalized as under Section 31.
The administrator shall exercise control and supervision over FSP’s assets and act in accordance with the rules prescribed by the Central Government.
The FSP has the right to be heard before the adjudicating authority passes any orders for its insolvency or dissolution.
If the FSP seeks to initiate voluntary liquidation, it shall obtain the specific permission from the appropriate regulator.
In fact, at the first glance, the newly introduced Rules resemble the principles earlier formulated by the government in the form of the controversial Financial Resolution and Deposit Insurance Bill 2017 (FRDI). The FRDI was eventually scrapped due to widespread panic regarding its ‘bail-in’ clause as fear loomed about the possibility of depositors being left with only INR 1,00,000 if the bank failed. The FRDI sought to establish a resolution corporation for insolvency of FSPs and empowered the same with exclusive authority to deal with the assets of the firm and undertake appropriate measures for a smooth liquidation. The resolution corporation was to consist of members comprising of personnel from the RBI, the Securities and Exchange Board of India, the Provident Fund Regulatory and Development Authority and the Insurance Regulatory and Development Authority. Amidst various similarities between the Rules and the FRDI is Clause 3(a) of the Rules, which envisages that an administrator shall function along with an advisory committee with three or more advisors.
The Rules have been termed as an interim mechanism by the Ministry of Corporate Affairs to resolve the impending exigencies. Nevertheless, the inclusion of NBFCs under the IBC regime is being treated as a welcome step by many, primarily their creditors who are now further empowered by a faster resolution process and resultant asset distribution mechanism under the ‘waterfall’ of Section 53. Although NBFCs will continue to fall within the ambit of ‘financial institutions’ under Section 45-I(c) of the Reserve Bank of India Act 1934, the multiplicity of judicial recourse further absolves the creditors from mandatory reliance on the RBI for any form of dispute resolution.
Au contraire, skepticism arises in initiating insolvency proceedings against the indispensable players of the FSP regime owing to their essential role in an economy which thrives upon a crucial investment mechanism. Therefore, it may be argued that the economy cannot be allowed to crumble down only to safeguard the interests of the creditors, since the general interest of the public, which is also the primary stakeholder in these financial institutions, could eventually transition into a state of vulnerability if the insolvency proceedings against even a sole FSP achieve fruition. The ultimate liquidation of an FSP conglomerate, prima facie, may not lead to any impact on the public at large but it could set off a train of events detrimental to the common objectives of the investors cum stakeholders in the national economy.
Further, the inclusion of FSPs under the IBC regime can prove to be inimical to the efficacy of the code given the magnanimous amount of litigation it has ensued since its enforcement and also considering that its marquee claim of a quick resolution process to its creditors is barely holding water. For instance, the recent Supreme Court of India's ruling in Pioneer Urban Land and Infrastructure Limited v Union of India (2019 SCCOnLine SCC 1005) has further reaffirmed the constitutional validity of homebuyers within the purview of the IBC. The eventual addition of FSPs within its ambit might pose infrastructural challenges for the NCLT which currently lacks a rudimentary assortment of precedents to quickly dispose of the litigations and is already burdened with a plethora of cases.
Expanding the ambit of the IBC further raises concerns over the statutory intent with which it was implemented, which was to dissuade parties from moving the NCLT and avoid litigations altogether and, in turn, to induce the corporate debtors to reach an agreement with their specific committee of creditors. While the Rules might serve the immediate purpose as an interim measure, the IBC-FSP regime will eventually require a well-formulated statutory mechanism which could be achieved either by solidifying the provisions under IBC as the absolute recourse or with a pedantic overhaul and subsequent resurgence of the FRDI.