Section 227 of the Insolvency and Bankruptcy Code 2016: Power to Notify Financial Service Providers
Section 227 of the Insolvency and Bankruptcy Code, 2016 (IBC) empowers the Central Government, after consultation with the appropriate financial sector regulators, to bring specified financial service providers or categories of financial service providers within a specially prescribed insolvency and liquidation framework under the Code.
Text of Section 227
Section 227 - Power of Central Government to notify financial service providers, etc.
Notwithstanding anything to the contrary contained in this Code or any other law for the time being in force, the Central Government may, if it considers necessary, in consultation with the appropriate financial sector regulators, notify financial service providers or categories of financial service providers for the purpose of their insolvency and liquidation proceedings, which may be conducted under this Code, in such manner as may be prescribed.
Meaning and Scope of Section 227
The provision begins with a non-obstante clause. Its purpose is to permit the Central Government to create a route under the IBC for the insolvency and liquidation of specified financial service providers even though financial service providers are generally treated differently from ordinary corporate debtors under the Code. The power is not automatic for every financial service provider. A provider or category must fall within a Central Government notification issued after consultation with the appropriate financial sector regulator.
Financial Service Provider and Financial Service
For understanding Section 227, the definitions in Section 3 of the IBC are relevant. Section 3(17) defines a financial service provider as a person engaged in the business of providing financial services in terms of authorisation issued or registration granted by a financial sector regulator. Section 3(16) defines financial service broadly and includes specified services such as accepting deposits, safeguarding and administering financial products, effecting contracts of insurance, offering financial products and providing certain investment-related services.
Section 3(18) defines a financial sector regulator to include authorities or bodies constituted under law to regulate financial services or transactions, including the Reserve Bank of India, Securities and Exchange Board of India, Insurance Regulatory and Development Authority of India and Pension Fund Regulatory and Development Authority.
Financial Service Providers Rules 2019
The Central Government notified the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019. These Rules provide the special procedural framework for financial service providers or categories of financial service providers notified under Section 227.
Under the Rules, provisions of the Code relating to corporate insolvency resolution and liquidation generally apply with specified modifications. Among the important modifications, proceedings against a notified financial service provider are initiated on an application by the appropriate regulator, and an administrator performs functions corresponding to those ordinarily performed by an insolvency professional, interim resolution professional, resolution professional or liquidator, subject to the Rules.
Notified NBFCs Including Housing Finance Companies
By notification dated 18 November 2019 under Section 227, the Central Government notified non-banking financial companies, including housing finance companies, having an asset size of Rs. 500 crore or more according to the last audited balance sheet, with the Reserve Bank of India as the appropriate regulator, for proceedings under the special FSP framework.
Relationship with the IBC Framework
Section 227 is located in Part V of the Code. It should be read with the definitions in Section 3, the applicable Central Government notifications and the Financial Service Providers Rules, 2019. The section creates an enabling statutory power; the detailed manner of conducting insolvency and liquidation proceedings is supplied by the prescribed rules and the relevant notification.
Related IBC Provisions
Readers may also refer to Section 225 - Power of Central Government to issue directions, Section 226 - Power of Central Government to supersede Board, Section 228 - Budget and the Insolvency and Bankruptcy Code 2016.
The statutory provision should be read with the latest applicable notifications, rules and regulations for the particular category of financial service provider.