The issue of assorted creditors taking multiple routes for recovery of their dues holding up financial resolutions of the likes of debt-laden shadow lender Dewan Housing Finance Corporation (DHFL) could soon be addressed, with the government instituting an interim resolution mechanism for systemically important financial service providers (FSPs) other than banks, pending the Financial Resolution and Deposit Insurance (FRDI) Bill.
According to the relevant rules issued and put into effect by the ministry of corporate affairs on Friday, the Reserve Bank of India or other financial-sector regulators as the case may be, can initiate the insolvency process for such FSPs under the Insolvency and Bankruptcy Code (IBC). This considerably consolidates the process in the hands of the regulator; for other classes of entities such corporate persons, LLPs partnership firms and individuals, either financial creditors or operational creditors or the debtor himself can initiate the insolvency process under the IBC.
A senior government functionary said it would also be left to the RBI to decide whether the interim mechanism could be used only in the case of deposit-taking NBFCs.
The government will separately notify the FSPs or categories of FSPs to be brought under the special dispensation under Section 227 of the Code, in consultations with the regulators concerned, the ministry said, adding, it would also name the special categories of NBFCs that don’t fall under the systemically-important category and whose resolutions could therefore be pursued under the normal provisions of the Code applicable to corporate debtors.
The exigency of having a resolution process under IBC for non-banking finance companies and other major FSPs have come to the fore after DHFL and Punjab and Maharashtra Co-operative (PMC) Bank landing in trouble. As for DHFL, even as most stakeholders agreed for resolution, some bondholders and mutual funds effectively thwarted the process as they sought repayment of their full dues and filed cases in debt recovery tribunals and courts. Now, consolidation and fast-tracking of the resolution process under IBC will be feasible, thanks to the new rules that provide for the necessary legal framework.
The ministry said that in the case of the special systemically important FSPs, the resolution process could be “initiated only on the application by the appropriate regulator” and that on admission of the application, the adjudicating authority (read NCLT) shall appoint the individual proposed by the regulator for initiation of the process as the Administrator. The person will have the same duties, obligations and rights and powers as enjoyed by the insolvency professional/resolution professional/liquidator in cases involving corporate debtors under the normal IBC process.
The rules further state that the regulator may appoint an advisory committee of three or more experts to advise the administrator in the operations of the FSP during the resolution process.
According to the ministry, an interim moratorium shall commence on and from the date of filing of the application for initiation of the process by the regulator till its admission or rejection by the adjudicating authority. The provisions of interim-moratorium or moratorium shall not apply to any third-party assets or properties in custody or possession of the FSP, including any funds, securities and other assets required to be held in trust for the benefit of third parties.
The administrator shall take control and custody of third-party assets or properties in custody or possession of the FSP and deal with them in the manner, to be notified by the central government under section 227.
The licence or registration which authorises the FSP to engage in the business of providing financial services shall not be suspended or cancelled during the interim-moratorium and the resolution process.
Upon approval of the resolution plan by the committee of creditors, the administrator shall seek ‘no objection’ from the appropriate regulator to the effect that it has no objection to the persons, who would be in control or management of FSP after approval of the resolution plan. The appropriate regulator shall issue ‘no objection’ on the basis of the ‘fit and proper’ criteria applicable to the business of the FSP without prejudice to the provision of Section 29A of the Code.
The FSP shall obtain prior permission of the appropriate regulator for initiating voluntary liquidation proceedings. The adjudicating authority shall provide the appropriate regulator an opportunity of being heard before passing an order for liquidation or dissolution of the FSP. It is not clear whether the cases filed by various creditors in different fora against DHFL will be nullified once the regulator starts a new IBC process for the troubled shadow lender.
Since the FRDI Bill is still in the works, the government reckons that an urgent alternative mechanism to deal with the insolvency resolution of financial service providers is needed, given the threat of the NBFC crisis otherwise not getting contained fast enough to avoid a major systemic problem. Hitherto, along with banks, other financial institutions have also been outside the purview of the IBC’s framework for resolution.
L Viswanathan, partner, Cyril Amarchand Mangaldas, said: “The (interim) framework strikes a good balance with initiation of resolution to be led by the regulator including appointment of an administrator and leaving the resolution to the approval of Committee of Creditors with suitable measures for engagement with the regulators for their approval in a timely manner on aspects that require their approval… The introduction of an initial moratorium on filing of a petition will help in avoiding unnecessary litigation and will discourage stakeholders from rushing to multiple fora on a default”.
Source: Financial Express, November 16, 2019