“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:

  1. a Company
  2. LLP
  3. 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?

The Code is applicable to all entities other than those which are specifically engaged in business of providing financial services listed in Section 3(16). Reliance has been placed on the definition of the financial service provider covered under Section 3(17) to suggest that it must be engaged in the business of providing financial service.

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:

    1. Accepting of deposits
    2. Safeguarding and administering assets consisting of financial products(see Note-2 below), belonging to another person, or agreeing to do so
    3. Effecting contracts of insurance
    4. Offering, managing or agreeing to manage assets consisting of financial products belonging to another person
    5. Rendering or agreeing, for consideration, to render advice on or soliciting for the purposes of—
      1. buying, selling, or subscribing to, a financial product
      2. availing a financial service or
      3. exercising any right associated with a financial product or financial service
    6. Establishing or operating an investment scheme
    7. Maintaining or transferring records of ownership of a financial product
    8. Underwriting the issuance or subscription of a financial product or
    9. 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;

 

Chapter IIIB of The Reserve Bank of India Act, 1934 relates to “Provisions Relating to Non-Banking Institutions Receiving Deposits and Financial Institutions”. It is not applicable to State Bank or a banking company as defined in Section 5 of the Banking Regulation Act, 1949 or a corresponding new bank as defined in clause (da) of Section 5 of the Act or Regional Rural Bank or a cooperative bank or a primary agricultural credit society or a primary credit society.

Section 45-I(a) defines-

“45-I Definition-In this Chapter, unless the context otherwise requires-
(a) business of a non-banking financial institution’ means carrying on the business of a financial institution referred to in clause (c) and includes business of a non-banking financial company referred to in clause (f)
Xxx

Section 45-I(c) defines “financial institutions” means any non-banking institution which carries on as its business or part of its business any of the following activities-namely-

(i) the financing, whether by way of making loans or advances or otherwise, of any activity other than its own;
(ii) the acquisition of shares, stock, bonds, debentures or securities issued by a Government or local authority or other marketable securities of a like nature;
(iii)Letting or delivering of any goods to a hirer under a hire-purchase agreement as defined in Clause (c) of Section 2 of the Hire Purchase Act, 1972 (26 of 1972).
(iv)the carrying of any class of insurance business.
(v)managing, conducting of supervising, as foreman, agent or in any other capacity, of chits or kuries as defined in any law which is for the time being in force in any State, or any business, which is similar thereto;
(vi) collecting, for any purpose or under any scheme or arrangement by whatever name called, monies in lump sum or otherwise, by way of subscriptions or by sale of units, or other instruments or in any other manner and awarding prizes or gifts, whether in cash or kind, or disbursing monies in any other way, to persons from whom monies are collected or to any other person,

But does not include any institution, which carries on as its principal business,-

(a) Agricultural operations; or
(aa)Industrial activity; or
(b) The purchase, or sale of any goods (other than securities) or the providing of any services; or
(c) The purchase, construction or sale of immovable property, so, however, that no portion of the income of the institution is derived from the financing of purchases, constructions or sales or immovable property by other persons.

Explanation-For the purposes of this clause, “industrial activity” means any activity specified in sub-section (i) to (xviii) of Clause (c) of Section 2 of the Industrial Development Bank of India Act, 1964.

Section 45-I(f) defines ‘non-banking financial company-

Section 45-I-Definition-In this chapter, unless the context otherwise requires
(j) “non-banking” financial company” means-

(i) A financial institution which is a company;
(ii) A non-banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme of arrangement or in any other manner, or lending in any manner.
(iii) Such other non-banking institution or class of such institutions, as the Bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify.

 

So, in general terms,  we can say that following persons are not included in the definition of the Corporate Debtors:

  1. Bank
  2. Financial institutes
  3. Asset Reconstruction Company
  4. Mutual Funds
  5. Insurance Companies
  6. Collective Investment
  7. Pension Funds

Subject to they are regulated by:

  1. RBI
  2. SEBI
  3. IRDAI
  4. PFRA
  5. any other as notified by the Central Government.

 

NBFC, MFI’s, banks  cover under Financial Service Provider:

In the matter Randhiraj Thakur, Director, Mayfair Capital Private Limited Vs. M/s. Jindal Saxena Financial Services Private Limited wherein NCLAT held that the application filed by financial creditor under Section 7 of the I&B Code is not maintainable against the company which has been granted a certificate of Registration under the Reserve Bank of India Act, 1934 giving status of a “Non-Banking Financial Institution.

Where company has been registered as a ‘non-banking financial company’ but has not been allowed to accept public deposit:

The definition of “financial service” if read with definition of “financial service provider”, it is clear that it is not necessary that the “financial service providers” must accept the deposits. The definition of ‘financial services’ as defined in Section 3(16) of the Code is not limited to the 9 activities as shown at Clause (a) to (i) of Section 3(16). The aforesaid Clauses (a) to (i) are inclusive which means there are other services means there are other services which come within the meaning of “financial services”.(Housing Development Finance Corporation Ltd Vs. RHC Holding Private Ltd-NCLAT)

 

Conclusion

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.

 

Case Laws

  1. 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.

 

Disclaimer: The views expressed in this article are the personal views and are purely informative in nature. The information contained in this document is intended for informational purposes only and does not constitute legal opinion, advice or any advertisement. This document is not intended to address the circumstances of any particular individual or corporate body. Reader should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a particular situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein. For full disclaimer, kindly go to disclaimer page.

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