Insolvency rules issued for financial services providers

By Sawant Singh and Aditya Bhargava, Phoenix Legal
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The presence of insolvency rules for non-financial companies in the form of the Insolvency and Bankruptcy Code, 2016 (IBC), and the lack of similar rules for financial companies led to a peculiar dichotomy. The IBC has been seen in most circles as a progressive move, and despite issues involving implementation is largely considered a success. In contrast, the high-profile collapse of a number of large financial sector entities, and the lack of such rules for financial sector entities has dampened investor and creditor confidence. Recent decisions in various fora have also seen creditors of financial sector entities pulling in different directions, thereby severely affecting potential recovery measures. While the government had introduced the Financial Resolution and Deposit Insurance Bill, 2016, to deal with the winding up of financial sector entities, this was later withdrawn after much controversy.

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Sawant Singh
Partner
Phoenix Legal

In exercise of powers under section 227 of the IBC, which enables the government to extend it to insolvency and liquidation proceedings of financial service providers or categories of financial services providers, the Ministry of Corporate Affairs issued the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019, on 15 November. The rules deal with insolvency and liquidation proceedings of financial service providers under the IBC, and extend the application of certain provisions of the IBC, such as on the corporate insolvency resolution process, liquidation process and voluntary liquidation process to financial service providers with some modifications.

The rules prescribe that a corporate insolvency resolution process can be initiated only upon application being made by the appropriate regulator. Such an application will be dealt with in the same manner as an application by a financial creditor. Upon admission, the relevant bench of the National Company Law Tribunal (NCLT) may appoint an administrator based on the recommendation of the appropriate regulator to exercise the powers and functions of an insolvency professional, resolution professional or a liquidator for the purpose of insolvency and liquidation proceedings. The rules also prescribe an interim moratorium from the date of the making of the application until its admission or rejection. This interim moratorium will have the same effect as a moratorium under section 14 of the IBC, including prohibiting the institution or continuation of suits, encumbering any assets, and taking any foreclosure or enforcement action.

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Sawant Singh and Aditya Bhargava are partners in the Mumbai office of Phoenix Legal. Sristi Yadav, an associate, also provided assistance on the article.

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