[Priyanshu Kumar is a fifth year law student at National University of Studies and Research in Law, Ranchi]
The IBC includes the process of resolution of insolvency of a corporate debtor, who is in default of payment of debt to either financial creditor or operational creditor, and that process is goes by the name, Corporate Insolvency Resolution Process (CIRP). By initiating the CIRP, an attempt has been made to revive or resolve and reorganize the corporate debtor. As, it should to be unforgettable that the primary objective of introducing the IBC is also for the interest of corporate debtor i.e., to revive and save the corporate debtor, even in the case of Swiss Ribbons case, the Supreme Court has stated that foremost and primary objective of implementing the IBC is the reorganization and insolvency resolution of the corporate debtor in a given time.
However, while introducing the Code the legislature intentionally excluded the financial service provider in the definition of "corporate person" in Section 3(7) of the Code, hence a financial creditor or operational creditor cannot commence CIRP against the corporate debtor. M/s Mayfair Capital Pvt. Ltd. case confirmed that due to its status as an FSP, Mayfair Capital Pvt. Ltd. is ineligible for treatment as a corporate debtor. It has been stated by the Committee to Draft Code in Resolution of Financial Firms that "standard insolvency and bankruptcy processes are usually not considered suitable for financial firms, particularly for those that handle consumer funds and those considered to be of systemic significance," The legislature has intentionally excluded the Financial Service Providers (FSPs) from the definition of the corporate person, and the rationales for such exclusion has been in following way, that:
In order to prevent a financial crisis from spreading like a Domino effect throughout the economy in the event that "systematically critical" financial institutions were to be fail.
Since Section 3(18) of the Code defines an FSP as a company that provides a public service under a statutory body's authority, it follows that FSPs use public money and that an insolvency in the FSP sector might threaten the country's financial stability.
In the most recent ruling by NCLT, the authority considered that "the financial companies vary from other organizations, among other things, since they manage huge quantities of consumer money," which is why the legislature has excluded the FSP from the definition of corporate debtor. As a result of the potential damage their failure might cause to the economy, they are deemed systemically significant. If the insolvency of the company debtor is an FSP, then the market might face systemic issues.
Trigger Points For Inclusion Of FSPs
At the beginning of Section 227 of the Code is the non-obstante clause "notwithstanding anything to the contrary (examined in this Code) or any other legislation for the time being in effect," implying that the provisions of the rest of the Code do not apply to this specific provision. As the spirit of the Section 227 suggests that After consulting with the financial sector regulator, the Central Government may continue with insolvency and liquidation procedures for a financial service provider (FSP) in the manner stipulated in the Code, such as Sections 7, 9, and 10. If the Central Government believes that the insolvency of a financial service provider poses a threat to the country's economy, it can consult with the financial sector regulator and initiate insolvency and liquidation proceedings in accordance with the Code's provisions. This was, in fact, the intention of the legislators who included Section 227 in the Code: to give the Central Government sufficient authority. The insolvency of FSPs or categories of FSPs was another factor that prompted the creation of IBCs so that authorities in the financial sector may use them if necessary. To be precise Central government stated, as there’s non-availability of an effective mechanism for the resolution of FSPs; and avoidance of ad-hoc and yet unavoidable case-by-case resolution approaches to deal with emergency situations in time of financial distress.
The Financial Resolution and Deposit Insurance Bill, 2017 was introduced in the Lok Sabha in 2017 to establish the system for the resolution of financial institutions, including NBFCs, prior to the introduction of the FSP Rules in 2019. For the purpose of ensuring the continuity of financial services for customers, the legislature included these provisions in an effort to meet the Financial Stability Board Key Attributes, 2014, which were established only for effective resolution regime for financial institutions. Also, the Finance Bill of 2019 revised the Reserve Bank of India Act, 1934 to include Section 45, which gives the RBI authority to resolve and reconstruction of the non-bank financial companies.
After that, another flashpoint occurred when the CBI filed charges against NBFC Dewan Housing Finance Limited for cheating 17 banks out of a total of Rs. 34,615 crores in loans. The government was so concerned about the state of the financial sector that it passed the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service providers and Application to Adjudicating Authority) Rules, 2019 or (“the FSP Rules, 2019”) under the authority granted to the Ministry of Corporate Affairs by Section 227 read with Section 239(2) (zk) of the Code, 2016. As of the 2019 fiscal year, the Central Government has made it mandatory for all NBFCs and financial institutions with a significant amount of public money involved to undergo bankruptcy and liquidation procedures in the event of debt default. More recently, on November 18, 2019, the Ministry of Corporate Affairs issued a notification stating that NBFCs with assets of Rs. 500 Crores or more will be subject to the insolvency and liquidation procedures outlined in the Insolvency and Bankruptcy Code (“the IBC”), as well as the Financial Services Providers (FSP) Rules and Regulations.
Fast- Track CIRP And FSPs’ Insolvency Resolution
After inclusions of FSP Rules 2019, the RBI can invoke the provisions of IBC, 2016 to initiate the CIRP process for financial service provider, who are in default. However, the process of CIRP is a time bound process, which is to be completed within 270 days, which can be extendable to 330 days with further extensions in circumstances provided in the Essar Steel case. Since the Financial service Providers dealt with the customer money at a large number, going through normal CIRP would be altogether new hindrance in resolving and reorganizing the business of the corporate debtors. Fast-Track corporate insolvency resolution process (Fast- Track CIRP), under Chapter IV of the Code, provides for the process to be completed within 90 days, which may be further extended up to 45 days more. To prevent the objective of the code i.e., to revive and resolve the corporate debtor, the fast-track process will be fruitful for financial service providers to protect the interest of the corporate debtor and customers. Also, it will serve the purpose for including the Fast-Track CIRP within the regime of the Code i.e., for ease of doing business, for easy entry and easy entry of the corporate debtor including financial service provider.
Section 55 of the Code has provided an eligibility criterion for the initiation of fast-track CIRP to be made in respect of the corporate debtors who has assets and income below a level, or has class of creditors or such amount of debt; or any other category of corporate person, which will be notified by the Central Government. Since the Central Government through new FSP Rules has openly declared that the financial service providers will now be considered as a corporate under Section 3, and the CIRP process may be initiated against such corporate persons, by such notification, it can be concluded that the financial service can be fitted within the ambit of Section 55(2)(a) or 55(2)(b) or 55(c) of the code. Section 55(2)(c) seems more reliable for the financial service providers to be included category of corporate persons, as this clause declares that corporate debtor can be such other category of corporate person which will be notified by the Central Government. Additionally, the fast-track CIRP will be initiated against such corporate person who are declared to be corporate debtor under Section 55(2)(c), i.e., financial service provider.
Even though, the applicability of the provisions related to Fast-Track CIRP is made especially applicable for the small company, a start-up other than a partnership firm, or unlisted company with the total assets less than Rs.1 Crore, however, the wording of the Section 55(2)(c) of the Code while giving a literal interpretation to the clause, shows an open door for the inclusion of the financial services providers too.
The FSP laws are simply temporary solutions, and the structure for a definitive process that may help struggling NBFCs has been a long time coming. It is not, however, the sole or even a long-term solution that will be necessary to bring the businesses of struggling FSPs back from the brink. To ensure customer safety and business continuity, it is unfortunate, but essential, that the term "financial service provider" is now included within the definition of "corporate person" in Section 3(7) of the Code. These FSP Rules will give stakeholders with much-needed respite until the permanent framework is completed, as they will have a clear position to implement a resolution plan and resuscitate the firm in the event of default. However, fast-track CIRP even though altogether different insolvency process which is completed within 90 days, but may prove to be another solution for resolving and reorganizing the business of corporate debtor including the financial service provider, who deal with the customer money at a large scale.
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