Key Features of Insolvency and Bankruptcy Rules, 2019

On Friday, the landmark Judgement in the Essar Steel case was passed by the Supreme Court of India, which gave priority to the financial creditors against the operational creditors. From the proceeds that will be generated from the liquidation process dues of the financial creditors will be released on a priority basis, and then the operational creditors will be paid. 

Not only came the Essar ruling but also a new rule for the Bankruptcy law was notified. Ministry of Corporate Affairs has notified the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019.

The new rules have been notified, especially for the insolvency proceeding against the Financial Service Providers (FSPs) and will not include banks. The central government framed the rules for the insolvency that is initiated against the FSPs and mentioned that an insolvency proceeding against the FSPs could only be taken only when an appropriate regulator makes the application.

Central Government power to make Rules 

As per section 227 r/w section 239(2)(zk) of the Insolvency and Bankruptcy Code, 2016 Central Government is empowered to make Rules. Rules that are framed as for now gives a general structure as to how to proceed with the Insolvency and Liquidation proceedings that are filed against the Financial Service Providers (systemically important). These Rules will apply to a list of FSPs that are notified by the Centre.

Applicability of The Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019

It is to be noted that provision for Liquidation Process, Corporate Insolvency Resolution Process and Voluntary Liquidation Process against the Corporate Debtor will in the same way for proceeding against the FSPs. However, it would be subject to the following limitation:

1. Corporate Insolvency process against the FSPs can only be initiated if the appropriate regulator makes the application.
2. Once the application is admitted, the Adjudicating authority will appoint an Administrator which will be based on the proposal given.
3. Functions, duties, rights, obligations, power and responsibilities of the Administrator will be the same as that of the Resolution Professional or Liquidator or Insolvency Professional or the Interim Resolution Professional
4. Appropriate regulator may make an application to the Adjudicating Authority to replace the Administrator
5. If required, the appropriate regulator can form a committee that will advise the Administrator. The committee should consist of experts of three or more.
6. The date when the application is filed, Interim moratorium will being and will continue until the application is either rejected or accepted by the Adjudicating Authority.
7. This period of Interim moratorium will not apply to any of the third part property of assets which is in the possession or the custody of the FSP. It will also include any fund, security or assets which is held in trust for the help of the 3rd party.
8. It will be the responsibility of the Administrator to take the custody and control of the 3rd party assets which is with the FSP and will manage it according to the procedure that the Central Government will be notified under section 227
9. The license or certificate of the FSP, which allows him to carry on the business will not be suspended when the Interim moratorium and Corporate Insolvency process is going on.
10. Once the CoC accepts the resolution plan, the Administrator will be required to get a No Objection certificate from the concerned regulator. This certificate would mean that the regulator has no objection against the body who will manage the FSP once the plan is approved. The No Objection Certificate issued should align with Section 29A of the Insolvency Code.
11. Before initiating the voluntary liquidation proceedings, the FSP will be required to get the approval of the appropriate regulator.
12. The appropriate regulator will be given an opportunity by the Adjudicating Authority of being heard before the regulator makes the order for dissolution or liquidation of the FSP.