Need a separate legal framework for resolution of financial service providers

Principal bench of National Company Law Tribunal (NCLT), Delhi, dismissed a corporate insolvency application under the Insolvency and Bankruptcy Code, 2016 filed by HDFC against RHC Holding, on the ground that RHC Holding is a ‘financial service provider’ and as such would not come within the ambit of the Code In September 2018, in a similar case, the National Company Law Appellate Tribunal, Delhi disposed of an appeal. Both the rulings went by the definition of ‘corporate person’ mentioned in the Code. The definition of a ‘corporate person’ under the Code is restricted to a company under the Companies Act, limited liability partnership created under the Limited Liability Partnership Act, 2008 or any other legal entity with limited liability created under any other law but excluding any ‘financial service provider’. As per the Code, a ‘financial service provider’ is one who is engaged in the business of providing financial services in terms of the authorisation granted by a financial regulator. Both the rulings only emphasise the point that the doors of the Code are closed for the creditors, who are in the business of providing financial services. An alternative course of action open to the creditors of the ‘financial service providers’ is to file a winding-up petition under the Companies Act, 2013 if the ‘financial service providers’ are incorporated as companies under the Companies Act, 2013. However, with the operationalisation of the Insolvency and Bankruptcy Code in 2016, the provisions of the Companies Act, 2013 were amended by deleting the words inability to pay as one of the grounds of winding up of a company. As a result of this amendment, currently no creditor of a company, which provides any financial service, would be able to file a winding-up petition against the defaulting company under the Companies Act, 2013. Interestingly, the Bankruptcy Code also contains a provision, that is Sec 227, in terms of which the central government may, in consultation with the appropriate financial regulators, notify financial service providers for the limited purpose of insolvency, which may be conducted under this Code. This provision on account of it being overriding in nature gives an extensive power to central government to notify the financial service providers under the Code. Be that as it may, currently most of the entities that are providing various financial services in the country have a complex nature of operations with direct implications for the financial markets. Further more, the clearly stated objective of the scheme of the Code is to provide for insolvency resolution of corporate persons, partnership firms, and individuals. By the very design of the Code, as held in both the decisions of NCLT and NCLAT referred to above, the ‘financial service providers’ are excluded from the definition of the ‘corporate person’. Ideally, the decision as to when the resolution of financial entities should take place is best left to the sectoral regulators as they monitor the health of the entities that operate under their regulatory purview. As failure of these ‘financial service providers’ could have very serious and adverse implications for the market, it is essential that a separate legal framework is put in place at the earliest to provide for a resolution framework for these entities.

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