§7, §9 and §10 of the Insolvency and Bankruptcy Code 2016 ('Code') stipulates the mechanism for initiation of corporate insolvency resolution process ('CIRP') against 'Corporate Debtors'. A 'Corporate Debtor' has been defined in §3(8) of the Code as "a corporate person who owes a debt to any person", but, importantly, the definition of a 'Corporate Person' excludes "any financial service provider"1 ('FSP'). Therefore, prior to 15 November 2019, the Code did not allow for the initiation of corporate insolvency resolution process or liquidation proceedings against an FSP, in the manner that is otherwise allowed against 'Corporate Debtors'.

The Code does, however, allow for the Central Government to notify FSPs or certain categories of FSPs for the purpose of conducting insolvency and liquidation proceedings under the Code, and also make rules for the manner in which such proceedings would be conducted2. In exercise of these powers granted to it under the Code, the Central Government has notified the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules 2019 ('FSP Rules') on 15 November 2019.

These FSP Rules only capture the scheme and manner in which the proceedings under the Code would be conducted against an FSP, as and when notified, and does not make the FSP Rules applicable to all the categories of FSPs contemplated under §3(17) of the Code. Rule 2 of the FSP Rules makes it clear that these rules would apply to FSPs, and categories of FSPs, that are notified by the Central Government. Till date, the Central Government has only notified "non-banking financial companies", including housing finance companies with an asset base of Rs.500 crores or more as FSPs for the purpose of the Rules. The 'Regulator' notified with respect to such FSPs is the Reserve Bank of India3,4.

With this background, a summary of the key provisions of the FSP Rules are below:

Insolvency Proceedings

Insolvency proceedings can be initiated against an FSP only upon an application ('Application') being made by the appropriate regulator, as notified by the Central Government for that particular type of FSP5('Regulator'). The Application will be treated as an application filed by a 'Financial Creditor' under §7 of the Code6. Once the Application is admitted, the 'Adjudicating Authority', "shall appoint the individual proposed by the appropriate regulator" as the 'Administrator'7 who shall exercise the same powers and functions otherwise exercised by a resolution professional, interim resolution professional or liquidator, as the case may be, under the Code8.

Interim Moratorium

§14 of the Code stipulates that a moratorium shall be declared from the date of admission of the Application. Apart from the moratorium as prescribed under §14 of the Code, an interim moratorium will commence from the date of filing of the Application to initiate the insolvency process by the Regulator, until its admission or rejection9. Further, the license or the registration of the FSP to engage in the business of providing financial services will not be suspended or cancelled during the interim moratorium or the moratorium as prescribed under §14 of the Code10.

Approval of Resolution Plan

Once the resolution plan is submitted and approved by the committee of creditors, the 'Administrator' is required to seek a "no objection" against the proposed management from the Regulator11. The Regulator is required to evaluate the "persons, who would be in control or management" of the FSP and grant its "no objection" on the basis of the "fit and proper" criteria applicable to the particular business of the concerned FSP. However, this decision by the Regulator would be subject to §29A of the Code, which identifies persons who are not eligible to be resolution applicants12.

Third Party Assets

The FSP Rules state that the interim moratorium and the moratorium, as prescribed under §14 of the Code, will not apply to any "third-party assets or properties in custody or possession of the financial service provider, including any funds, securities and other assets required to be held in trust for the benefit of third parties"13.

The FSP Rules also provide that the 'Administrator' will take control of all third party assets that are in the possession of the FSP only for the "purpose of dealing with them in the manner, as may be notified by the Central Government under Section 227". No such notification has yet been issued by the Central Government, and in the absence of one in terms of the manner to deal with such assets, it may be argued that the 'Administrator' cannot take control of these assets at all, and these assets would be subject to the regular functioning of the FSP in question14.

Any other construction, such as the 'Administrator' only taking control without authority to deal with them, given the absence of the required notification by the Central Government, would, effectively, lead to the freezing of these third party assets, which would, in turn, be detrimental to the functioning of the FSP, and could also, depending on the nature of the business of the FSP, restrict the FSP in carrying on its business.


In instances wherein an order for liquidation or dissolution of the FSP can be passed by the Adjudicating Authority, the Adjudicating Authority is bound to hear the Regulator before passing such an order15. However, in instances of voluntary liquidation of the FSP, the FSP is required to obtain permission from the appropriate Regulator before initiating the voluntary liquidation process16.

The FSP Rules also stipulate that the license or the registration of the FSP to engage in the business of providing financial services shall not be suspended or cancelled during the liquidation process, unless an opportunity of being heard is granted to the Administrator17.

Impact on the Aviva Judgement

Just prior to the notification of the FSP rules, the NCLT Delhi Bench, in Apeejay Trust v Aviva Life Insurance18, while admitting the application for initiating CIRP under §9 of the Code against Aviva Life Insurance Company India Limited ('Aviva'), which is an FSP, to apparently overcome the embargo contained under the Code, made a distinction on the basis that the operational debt in the matter was not in relation to "Financial Services" provided by the FSP but rather regarding leasehold dues owed by Aviva which is an unrelated transaction entered into by such a service provider. The reasoning of the NCLT appears to be that the intention of the legislature in drafting the Code, was to only exempt or keep out claims against FSPs so long as the admitted debt was in relation to or arising out of the "Financial Services" being provided by the said FSPs, and not otherwise.

However, what appears to be the NCLT's understanding of the intention behind these provisions of the Code excluding FSP's, which forms the underlying basis of its decision, may not be aligned to the terms contained in Rule 5(a)(i) of the FSP Rules which have been extracted below:

"(i) no corporate insolvency resolution process shall be initiated against a financial service provider which has committed a default under section 4, except upon an application made by the appropriate regulator in accordance with rule 6"

While insurance companies have not yet been notified by the Central Government as required by the FSP Rules, which means that the embargo under the Code continues to apply to such companies, it is interesting, for the purpose of understanding the intention behind the Code and the FSP Rules thereunder, to note that Rule 5(a)(i) of the FSP Rules does not create any differentiation between a default committed by the FSP while undertaking the applicable "Financial Service" from default with respect to transactions unrelated to the financial service being provided by the FSP in question.

The intention of the Code read with the FSP Rules appears to be that no application can be preferred against the FSP for any default whatsoever, whether linked to the financial services being provided by it or not, can be initiated by any party apart from the notified 'Regulator'. A precursor to this is arguably the understanding that prior to the FSP Rules, there was an embargo on such CIRP proceedings under the Code? against FSPs, irrespective of whether or not the default was in relation to the financial service being provided by the FSP.

Another aspect of the FSP Rules, which may also have an implication on the decision by the NCLT in the Aviva Life case, is if a default of an operational debt, whether or not in relation to the financial services being provided by the FSP, can be a basis for initiating CIRP against the concerned FSP.

Rule 5(a)(ii) of the FSP Rules states that an application under Rule 5(a)(i) by the applicable 'Regulator' "shall be dealt with in the same manner as an application by a financial creditor under section 7...". The question that arises is whether, by virtue of this provision, the applicable 'Regulator' is, effectively, barred from moving an application for CIRP in relation to an operational debt of the FSP in question. It appears that the answer to this question may be in the affirmative, since this provision, if taken as only a deeming provision, would imply that the protections/defences otherwise available to a 'Corporate Debtor' under §8 of the Code, would cease to exist in case of an FSP.

As there is no basis to assume or explain this drastic difference in approach, that too, to the detriment of an FSP as compared to a 'Corporate Debtor' it can be said that the intention of the legislature is to exclude operational debts as being a basis for the Regulator to initiate CIRP. If this be the case, then the rationale of the NCLT in the Aviva Life19 case could be challenged in any other proceedings that may be initiated on similar lines against a non-notified FSP.


1. §3(7) of the Code.

2. §227 of the Code.

3. Notification [S.O.4139(E)] of 18 November 2019.

4. It may be noted that the Central Government has not yet notified Insurance Companies (or the authority to act as the 'Regulator') under §227 of the Code, for the purposes of the Code. Separately, §52A of the Insurance Act 1938, grants the power to the Insurance and Regulatory Authority of India ('IRDAI'), to appoint an 'Administrator' for, inter alia, management of the insurance business in certain circumstances. It appears that this power would continue to exist, despite the FSP Rules and any subsequent notification by the Central Government, since the object and purpose and powers of the 'Administrator' under the two statutes are different.

5. Rule 5(a)(i) of the FSP Rules.

6. Rule 5(a)(ii) of the FSP Rules.

7. Rule 5(a)(iii) of the FSP Rules.

8. Rule 9(2) of the FSP Rules.

9. Rule 5(b)(i) of the FSP Rules.

10. Rule 5(b)(ii) of the FSP Rules.

11. Rule 5(d)(ii) of the FSP Rules.

12. Rule 5(d)(iii) of the FSP Rules.

13. Rule 10(1) of the FSP Rules.

14. Rule 10(2) of the FSP Rules.

15. Rule 7(b) of the FSP Rules.

16. Rule 8(a) of the FSP Rules.

17. Rule 7(a) of the FSP Rules.

18. Apeejay Trust v Aviva Life Insurance [(IB)-1885(ND)/2019].

19. As per the information available in public, it appears that Aviva has settled the dispute with Apeejay Trust.

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