Status as on: 31/03/21

With the institution of a codified law on insolvency and bankruptcy processes, restructuring jurisprudence set foot in a new age. While the IBC legislation focuses on rehabilitating and reforming troubled businesses, it prohibits financial service providers (FSPs) such as non-banking finance companies (NBFCs) and insurance companies from its sphere.

The argument that FSPs involve public money and any insolvency in this sector could potentially cause economic unreliability was one of the key rationale given for prohibiting them from the context of the Insolvency and Bankruptcy Code, 2016 (IBC). The National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal have also said on the clear exclusion of FSPs in rulings, confirming that because the IBC’s concept of corporate persons wholly excludes any category of FSPs, the corporate insolvency resolution procedure (CIRP) cannot be initiated against any FSPs. The IBC has been amended to provide a framework for restructuring FSPs due to the fluctuating economy, the liquidity crisis created by FSPs such as DHFL, and inadequate restructuring processes enforced by regulators for some FSPs.

The government issued rules on the applicability of the IBC to different categories of FSPs in the year 2019. The government declared on November 18, 2019 that these regulations would apply to NBFCs (including housing finance companies) with assets of around $5 billion. Although most of the IBC’s regulations concerning a company’s CIRP are now applicable to NBFCs, but there are some exceptions.

In contrast to the creditor-driven system used for other companies’ CIRP, the new regulations also implemented a regulator-driven foundation. Only on the Reserve Bank of India’s (RBI) application before the NCLT can an insolvency application be filed against NBFCs. The RBI’s extensive database of credit information on various NBFCs lowers the likelihood of frivolous applications. The CIRP will be started after a regulatory authority takes an informed decision. Furthermore, the RBI would be aware of the various types of public money and securitized assets, allowing it to evaluate financial and legal implications.

The rules also require the appointment of an administrator to serve as an insolvency practitioner, as recommended by the RBI. For any insolvency or liquidation proceedings involving such as NBFCs, the administrator’s role has been increased to include the powers and functions of an interim resolution professional, resolution professional, or liquidator.

Another distinction is that the RBI must send a “no objection” letter within 45 days after the Committee of Creditors (CoC) has accepted the resolution plan and the proposed management of the NBFC. The CoC’s right to finalize a resolution plan has been questioned in the courts on various occasions, but the Supreme Court upheld the CoC’s resolution plan in the Essar Steel insolvency process, maintaining that the courts can’t intervene with a commercial decision made by the CoC. Although there is a time limit for receiving a no objection letter, sticking to the deadline may be challenging if the resolution plan is not accepted by the RBI. The RBI’s discretion in scrutinizing and providing no objection letter to resolution proposals still remains in the grey area.

Conclusion-

The IBC’s applicability to NBFCs is a welcome legislative effort, and the new rules have extended the RBI’s role in performing an NBFC’s CIRP. However, if the procedures that will control the insolvency process for NBFCs are not explained, the likelihood of a successful application of this system will be poor. The new rules are just a stopgap measure; a comprehensive specialized system for financial resolution of FSPs is still in the works. Since the system is vague, a fractured, biased, and unsatisfactory result is possible.

In any case, it will be fascinating to see how the regulator-driven structure will rehabilitate stressed NBFCs and usher in a new chapter of insolvency jurisprudence, given the NCLT’s recent decision to admit RBI’s application to initiate CIRP against DHFL.

Disclaimer – The above article is based on the personal interpretation of the related orders and laws. The readers are expected to take expert opinion before relying upon the article. For more information, please contact us at ibc@centrik.in