Insolvency and Bankruptcy Updates November 2019

Insolvency and Liquidation Proceedings of Financial Service Providers

On 15th November 2019, the Ministry of Corporate Affairs (“MCA”) notified the Insolvency and Bankruptcy (Insolvency and Liquidation of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 (“Rules”) pursuant to Section 227 of the Insolvency and Bankruptcy Code, 2016 (“IBC”). Under Section 227, the Government may notify such financial service providers (“FSPs”) or categories of FSPs to be subject to the provisions of the IBC in relation to insolvency resolution and liquidation.

Further, on November 18, 2019, the MCA notified that systemically important non-banking financial companies and housing finance company with asset size more than INR 5,000,000,000 (Indian Rupees Five Hundred Crores) to be FSPs for the purposes of Section 227 and the RBI to be the appropriate regulator in respect of such entities.
The Rules layout the framework for insolvency resolution and liquidation proceedings of FSPs.

  1. Initiation of CIRP

    Under the Rules, the corporate insolvency resolution process (“CIRP”) in respect of an FSP may be initiated only by the appropriate financial regulator (such as the Reserve Bank of India (“RBI”)). This Rules authorize the financial regulator to take suo-moto action against the FSP if such FSP is in default of dues of INR 100,000 or more.

    The Rules provide that an insolvency resolution application filed in respect of an FSP will be dealt with by the National Company Law Tribunal (“NCLT”) in the same manner as an application filed by a financial creditor against a corporate debtor. It has been clarified that presently, the regulator who makes an application for initiation of the CIRP against an FSP shall follow the same procedure as under the National Company Law Tribunal Rules, 2016. This procedure may be amended once the MCA notifies separate rules for FSPs in this regard.

  2. Moratorium

    The moratorium on the institution of suits, continuance of legal proceedings, transfer, disposal or recovery of any assets of the FSP under Section 14 of the IBC shall come into effect as an interim-moratorium at from the date of filing of the insolvency resolution application by the appropriate regulator. However, the license of the FSP to provide its financial services shall not be cancelled or suspended during the interim-moratorium or moratorium.

    During the subsistence of the interim-moratorium or the moratorium, if the FSP has any assets, funds, securities or any such asset which is held by the FSP on trust for the benefit of third-parties (“Third-Party Asset”) then such Third-Party Asset shall remain free from the effect of interim and final moratorium and the Administrator shall deal with such Third-Party Assets as may be notified by Government pursuant to Section 227 of the IBC. However, the provisions governing Third Party Assets has not been given effect to.

  3. Insolvency Professional

    The Rules provide that the NCLT will appoint as an administrator the person proposed by the financial regulator for such appointment. Further, Rule 9 of the Rules, provides that such an administrator shall fulfil the role of insolvency professional, interim resolution professional, resolution professional or liquidator, as the case may be.

  4. Advisory Committee

    Unlike a regular CIRP, the financial regulator is entitled to form an advisory committee (“AC”) within forty-five (45) days of the date on which the NCLT admits the insolvency petition.

    This AC shall consist of three (3) members and the chairman of such committee shall be the administrator who has been appointed by the financial regulator as in the insolvency application against the FSP. The members of the AC are required to have expertise in finance, accountancy, law, public policy or other areas of financial services. The function of the AC is to assist the Administrator in discharging its obligations under the IBC.

  5. Resolution Plan

    Under Rule 5 (d) of the Rules, the resolution applicant (“RA”) shall submit a resolution plan in respect of the FSP.

    Upon such resolution plan being accepted by the committee of creditors as under Section 30 (4) of the IBC, the same is required to be submitted to the financial regulator (and applicant) for a certificate of no-objection including confirmation on the satisfaction of fit-and-proper criteria of the RA.

    The Rules have also contemplated that, in the event the financial regulator does not provide a no-objection certificate within forty-five (45) days of such an application being filed, then it shall be assumed that the financial regulator in question has no-objection to the resolution plan being made effective.

  6. Liquidation Process

    The provisions of the IBC as regards the liquidation process will apply to the liquidation process of an FSP, subject to the following exceptions:

    (i) the license of the FSP shall not be suspended or cancelled during the liquidation process until the liquidator has been given an opportunity to be heard by the NCLT; and

    (ii) the financial regulator (shall also be provided an opportunity to be heard by the NCLT before an order is passed for liquidation as under Section 33 of the IBC or dissolution under Section 34 of the IBC.

  7. Voluntary Liquidation Process

    The Rules clarify that the provisions for voluntary liquidation shall be applicable to FSPs in the same manner as they are applicable to corporate entities. As above, the Rules have provided for modifications to the process as under the IBC in the following way:

    (i) if an FSP wishes to liquidate itself then it must approach the relevant regulator for permission under Section 59 of the IBC for the initiation of such proceedings;

    (ii) the affidavit as is required to be filed by the entity which wishes to initiate voluntary liquidation shall include a declaration that the permission of the financial regulator as sought under (i) above has been obtained; and

    (iii) the financial regulator (and applicant) shall also be provided an opportunity to be heard by the adjudicatory body before an order is passed for voluntary liquidation under Section 59 of the IBC.

Insolvency Resolution Process for Personal Guarantors to Corporate Debtors

The MCA on 15 November, 2019 also published the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 (“PG Rules”).

Under the PG Rules, the MCA has notified the process which must be followed by a personal guarantor in order to initiate voluntary insolvency proceedings and for creditors to initiate insolvency proceedings against the personal guarantors.

Under Rule 6, the guarantor shall either by itself or through a resolution professional be entitled to file an application with respect to Further, the guarantor will also be required to serve notice to the corporate debtor and every financial creditor of such application.
The creditors have also been given the right to file for initiation of insolvency process themselves or through a resolution professional as per the notified form against the personal guarantor of the corporate debtor. Prior to filing of such application, the creditor has to serve a demand notice in the format prescribed to the guarantor demanding payment of the amount in default within fourteen days from the receipt of the notice and if payment is not made, the creditor may file an application for initiation of the insolvency process in the format prescribed.

Additionally, Rule 5 of the PG Rules has clarified limits for “excluded assets” as under the Section 79 (14) of the IBC. “Excluded assets” are those which shall not be proceeded against in the event of insolvency proceedings against the corporate debtor and/or guarantor. The limits therein have been revised as follows for their applicability to personal guarantors: (i) unencumbered personal ornaments shall not exceed INR 100,000; (ii) unencumbered single dwelling owned by the debtor shall not exceed INR 2,000,000 for urban area and INR 1,000,000 for a rural area. The definition for “rural area” is to be as under the National Rural Employment Guarantee Act, 2005.

Conclusion

The Rules seek to address a significant gap in not having an insolvency resolution process and liquidation process under the IBC for FSPs.

The Government has been pragmatic in its approach by only allowing the relevant regulator to initiate proceedings against the FSPs and not any other creditor who the FSP may be indebted to. However, the effective role of the administrator will be key to successful implementation of the Rules.

The PG Rules, come into effect from December 1, 2019 and provides a defined regime under which creditors may enforce their claims against. It is important to note that the PG Rules do not apply to personal guarantors of FSPs but only to corporate debtors.