Insolvency & Liquidation of Financial Service Providers: IBC’s Special Provisions – Adv. Vishawjeet Singh and Adv. Yash Gupta

Insolvency & Liquidation of Financial Service Providers: IBC’s Special Provisions

Adv. Vishawjeet Singh and Adv. Yash Gupta
(Pursing Graduate Insolvency Programme- IICA)

The Insolvency process of Corporate Debtors is governed by Insolvency and Bankruptcy Code (“IBC”), 20161. Nevertheless, Financial Service Providers were kept outside the purview of the IBC. According to Section 3(17), a financial services provider is someone who is authorized or registered by a ‘financial sector regulator’ to offer financial services. Meanwhile, Section 3(16) defines “financial service” read as under:

(16) “financial service” includes any of the following services, namely: –

a) accepting of deposits;

b) safeguarding and administering assets consisting of financial products, belonging to another person, or agreeing to do so;

c) effecting contracts of insurance;

d) offering, managing or agreeing to manage assets consisting of financial products belonging to another person;

e) rendering or agreeing, for consideration, to render advice on or soliciting for the purposes of––

(i) buying, selling, or subscribing to, a financial product;

(ii) availing a financial service; or

(iii) exercising any right associated with financial product or financial service;

f) establishing or operating an investment scheme;

g) maintaining or transferring records of ownership of a financial product;

h) underwriting the issuance or subscription of a financial product; or (i) selling, providing, or issuing stored value or payment instruments or providing payment services

Although the code did not initially address the insolvency of financial service providers, the central government retains the authority, as provided by Section 227 of the code, to notify Insolvency and Liquidation of FSPs Rules whenever deemed necessary.

Jurisprudence of FSP Rules

The meaning of FSP and what activities fall under the category of financial services was discussed in the case of Housing Development Finance Corporation Ltd. V RHC Holding Private Ltd [2019] 102 NCLAT. The NCLAT held that:

“13. Definition of ‘financial services’ as defined in section 3(16) of I&B 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 which comes within the meaning of financial services.”

The question in the above said case was whether the respondent is a FSP or not, the respondent is primarily in the business of investment in shares, bonds, debentures, debts or loans in group companies, money market instruments including money market mutual funds and giving guarantees on behalf of group companies.

The NCLAT held that as defined in Section 45-I(c)(ii) of the Chapter IIIB of the RBI Act, 19342 the “financial institutions” means any non-banking institution which carries on business in activities in the acquisition of shares, stock, bonds, debentures or securities issued by a Government or local authority or other marketable securities of a like nature. Hence, the respondent being a non-banking financial institution is carrying on business of financial institution and thereby it being financial service provider do not come within the meaning of corporate Person/ Corporate Debtor.

FSPs have been excluded from the ambit of the definition of “Corporate Debtor” under the code. According to Section 3(16)(a), NBFCs providing deposit taking  services shall qualify under the definition of “financial service”. Same was reiterated by NCLT Principal Bench in M/s Jindal Saxena Financial Services Pvt. Ltd. V. M/s Mayfair Capital Pvt. Ltd (2018) 55 NCLT.

In this case, the Court ruled that simply being registered as an NBFC does not necessarily mean that all transactions, regardless of their nature and character, will be considered as activities of a financial service provider.

However, an appeal was filed before the NCLAT as Randhiraj Thakur, Director, Mayfair Capital (P) Ltd. Vs. M/s. Jindal Saxena Financial Services (P) Ltd [2018] 79 NCLAT, the court held that

“10. 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.”

Even though the NCLAT overturned the NCLT’s ruling, upholding the view that NBFCs, among other entities, should be treated as financial service providers, an NBFC can engage in a number of activities that do not all meet the criteria for a financial service provider, such as purchasing goods, leasing properties, using professional services, etc. As a result, it would not be accurate to assume that NBFCs are exempt from the IBC’s jurisdiction simply because they are FSPs without first examining the activities in which NBFCs are engaged in.

FSP Rules

The Central Government notified the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 (“FSP Rules”) on November 15th, 2019 under Section 227 read with clause (zk) of sub-section (2) of Section 239 of the Code. Only FSPs that the Central Government notifies time to time in accordance with Section 227 will be subject to the FSP Rules. The framework outlined in the Rules pertains to the Insolvency and Liquidation procedures of systematically important FSPs, excluding banks. With certain modifications, all the rules of Corporate Insolvency Resolution Process (“CIRP”) apply to FSPs in the way specified in the Rules.

I. Initiation of CIRP

According to Rule 6 FSP Rules, CIRP can be initiated against the FSP only when an application is filed by the “appropriate regulator”. The application so filed shall be dealt with in the same manner as that of an application by Financial Creditor under Section 7 of the Code.

II. Appointment of Administrator

After the Adjudicating Authority admits the application, an individual is appointed who is proposed by the “Appropriate Regulator” called as “Administrator” who works on the same principles as that of “Interim Resolution Professional”, “Resolution Professional” or “Liquidator”.

III. Interim Moratorium

According to IBC, moratorium under Section 14 begins after the application is admitted by the Adjudicating Authority and no moratorium can arise if it doesn’t admit an application. Once the moratorium is declared, no legal proceedings can be started or continued against the Corporate Debtor. Meanwhile in case of FSPs, an interim moratorium begins from the date of submission of an application by the “appropriate regulator”.

IV. Formation of Advisory Committee

To assist the Administrator in the operations of the FSP, an advisory committee is constituted on the advice of the ‘appropriate regulator’ within 45 days of Insolvency Commencement Date (“ICD”). The Advisory Committee shall consist of three or more members who have experience or expertise in any of the following fields:

(a) Finance

(b) Economics

(c) Law

(d) Public policy

(e) Areas of Financial Services or risk management

(f) Administration

(g) Supervision

(h) Resolution of FSP

Meeting of advisory committee is chaired by the administrator,

V. Resolution Plan & No objection Certificate

The Resolution Plan shall include a statement explaining how the resolution applicant satisfies or intent to satisfy the requirements of engaging in the business of the financial service provider, as per laws for the time being in force. If the Committee of Creditors approves the resolution plan, the administrator must obtain a “no objection” from the appropriate regulatory authority regarding the person who will be in charge and manage the FSP after the plan is approved under section 31. The appropriate regulator will issue the “no objection” statement based on the” fit and proper” criteria applicable to the business of financial service providers, taking into account the provisions of section 29A.

VI. Liquidation and Voluntary Liquidation Process

The opportunity of being heard is to be provided to the appropriate regulator before passing an order of liquidation under Section 33 or dissolution under Section 54 of the FSP.

A prior permission of appropriate regulator is required by FSP before initiating voluntary liquidation under the code.

 Third Party Assets

According to Rule 10(1) of the “FSP Rules”, Rule 5(b) and Section 14 i.e. Moratorium shall not apply to the third party assets or properties in custody of FSP, including any funds, securities and other assets required to be held in trust for the benefit of third parties.

Clause 2 Rule 10 of “FSP Rules” states that the central government has the power to specify the procedure for the Administrator to take control and possession of third-party assets or properties held or controlled by the FSP. This includes any funds, securities, or other assets that are held in trust solely for the benefit of third parties, and the purpose of this power is to enable appropriate management of these assets.

Ministry of Corporate Affairs (“MCA”) on 18th Nov, 2019 issued a notification under Section 227 of the Code designating Reserve Bank of India (“RBI”) as the appropriate regulator of systematically important Non-Banking Financial Companies (“NBFCs”). The MCA issued another notification on 30th Jan, 2020 under Section 227 read with Rule 10(2) of the “FSP Rules” outlining the procedure for managing third-party assets held or controlled by FSP by an administrator appointed under the FSP Rules.


The introduction of the FSP Rules is a critical and timely first step in resolving financial firms in India. These Rules provide a unique interplay between the processes outlined in the Insolvency and Bankruptcy Code (IBC) and the principles that are distinct but complementary to financial firms. The regulator, the Committee of Creditors (CoC), and the adjudicating authority each have a specific role to play in this process.

The FSP Rules will bring much-needed relief to the stakeholders involved in the financial sector, as they now have a clear path to implement resolution plans. However, it is essential to note that the FSP Rules are an interim measure, and comprehensive legislation in this regard will be crucial. As the resolution of FSPs is undertaken through these Rules, it is crucial to monitor the implementation of this framework closely. The FSP Rules provide a necessary first step in addressing the challenges faced by the financial sector, but a comprehensive legislative framework is needed to provide a lasting solution.

Therefore, the FSP Rules are a critical first step in resolving financial firms in India, providing a clear path for stakeholders to implement resolution plans. However, ongoing monitoring and the development of comprehensive legislation are needed to address the challenges faced by the financial sector fully.

Disclaimer: The Opinions expressed in this article are that of the author(s). The facts and opinions expressed here do not reflect the views of IBC Laws ( The entire contents of this document have been prepared on the basis of the information existing at the time of the preparation. The author(s) and IBC Laws ( do not take responsibility of the same. Postings on this blog are for informational purposes only. Nothing herein shall be deemed or construed to constitute legal or investment advice. Discussions on, or arising out of this, blog between contributors and other persons shall not create any attorney-client relationship.


1 Insolvency and Bankruptcy Code, 2016.
2 Reserve Bank of India Act, 1934.