“Decoding the Code”
Financial Service Provider under the Code
We discuss in this article on question whether a bank can file an application for initiating CIRP against another (bank) when a default has occurred. Similarly question raises whether an insured/policyholder/beneficiary can file an application against Insurer on default in paying insurance dues.
I. Applicability of the Code
As per Section 2 of the Insolvency and Bankruptcy Code, 2016 (referred as ‘IBC’ or ‘the code’), the code is applicable on following persons:
(a) any company incorporated under the Companies Act;
(b) any other company governed by any special Act for the time being in force, except in so far as the said provisions are inconsistent with the provisions of such special Act;
(c) any LLP;
(d) such other body incorporated under any law for the time being in force, as the Central Government may, by notification, specify in this behalf;
(e) personal guarantors to corporate debtors;
(f) partnership firms and proprietorship firms; and
(g) individuals, other than persons referred to in clause (e).
II. Persons who can initiate Corporate Insolvency Resolution Process(CIRP)
As per Section 6 of the Code, application for initiating CIRP may be filed by:
1. a financial creditor or
2. an operational creditor or
3. the corporate debtor itself
before Adjudicating Authority on commits a default by the corporate debtor in repayment of debt.
As per section 7, a financial creditors either by itself or jointly with other financial creditors, may file application for initiating CIRP against a corporate debtors before Adjudicating Authority.
Similarly, as per section 8, an operation creditor may file application against corporate debtor and as per section 10, a corporate applicant may file application against corporate debtor before Adjudicating Authority.
III. Corporate Debtor under the IBC
As per Section 3(8), Corporate Debtor means a corporate person who owes a debt to any person.
Section 3 (7) defines the Corporate Person as under:
“(7) “corporate person” means a company as defined in clause (20) of section 2 of the Companies Act, 2013, a limited liability partnership, as defined in clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008, or any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider;”(Emphasis provided)
So, as per sub-section 7 of the Section 3, the corporate persons means:
- a Company
- any other persons incorporated with limited liability under any law.
BUT not included Financial Service provider.
That is a financial creditor and an operational creditor cannot file application for initiation of CIRP against the financial service provider and financial service provider also cannot file application against himself.
IV. Who are Financial Service Providers?
As per Sec. 3(17), financial service provider means a person engaged in the business of providing financial services in terms of authorisation issued or registration granted by a financial sector regulator(See Note-1 below).
The Code has defined following financial services:
- Accepting of deposits
- Safeguarding and administering assets consisting of financial products(see Note-2 below), belonging to another person, or agreeing to do so
- Effecting contracts of insurance
- Offering, managing or agreeing to manage assets consisting of financial products belonging to another person
- Rendering or agreeing, for consideration, to render advice on or soliciting for the purposes of—
- buying, selling, or subscribing to, a financial product
- availing a financial service or
- exercising any right associated with a financial product or financial service
- Establishing or operating an investment scheme
- Maintaining or transferring records of ownership of a financial product
- Underwriting the issuance or subscription of a financial product or
- Selling, providing, or issuing stored value or payment instruments or providing payment services.
Note-1: Financial sector regulator means an authority or body constituted under any law for the time being in force to regulate services or transactions of financial sector and includes the Reserve Bank of India, the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority of India, the Pension Fund Regulatory Authority and such other regulatory authorities as may be notified by the Central Government;
Note-2: Financial products means securities, contracts of insurance, deposits, credit arrangements including loans and advances by banks and financial institutions, retirement benefit plans, small savings instruments, foreign currency contracts other than contracts to exchange one currency (whether Indian or not) for another which are to be settled immediately, or any other instrument as may be prescribed;
So, in general terms, we can say that following persons are not included in the definition of the Corporate Debtors:
- Financial institutes
- Asset Reconstruction Company
- Mutual Funds
- Insurance Companies
- Collective Investment
- Pension Funds
Subject to they are regulated by:
- any other as notified by the Central Government.
A financial creditor or an operational creditor cannot file application for initiating CIRP against financial service provider even if they maybe corporate entities because these are not corporate debtors under the Insolvency and Bankruptcy Code, 2016. A Financial Service provider can file application to initiate CIRP against any corporate debtor, if the corporate debtor commits defaults. However, if a bank takes loan from the another (bank) or from any financial service provider, the debt taker bank cannot file application for initiating CIRP against other bank(or against financial service provider) as debt owned bank is out of purview of the Code as a financial service provider as discussed in the this article. Similarly, insurer is out of purview of the Code.
- Randhiraj Thakur, Director, Mayfair Capital (P) Ltd. Vs. M/s. Jindal Saxena Financial Services (P) Ltd.-NCLAT:
If the entire scheme of the I&B Code is seen, it will be evident that the Code is to consolidate and amend the laws relating to reorganisation and insolvency resolution of ‘corporate persons’, ‘partnership firms’ and ‘individual’ in a time bound manner. It is a self-contained Code which is exhaustive in nature when it comes to reorganisation and insolvency resolution. However, an exception had been carved out while enacting the Code that the ‘financial service providers’ have been kept outside the purview of the Code. Being a consolidating legislation only those acts are permitted which are mentioned in the Code and it cannot be made applicable to ‘financial service providers’ including ‘non-banking financial institutions’ and MFI’s banks, which have been kept outside the purview of the Code.
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