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Peer to Peer Lending Platform (Reserve Bank) Directions, 2017

Peer-to-peer lending (P2P) is a method of debt financing that enables individuals to borrow and lend money. The advantage to the lenders is that the loans generate income in the form of interest. The borrower may either be a person or a legal entity (e.g., a company) and the rates of interest may either be set by the online P2P platform or both the parties to the loan agreement.

The Reserve Bank of India (hereinafter, the Bank) vide notification number DNBR/2017-18/57 dated 4th October, 2017 in exercise of the powers conferred under section 45IA, 45JA, 45L, and 45M of the Reserve Bank of India Act, 1934 has issued directions for compliance by every Non-Banking Financial Company that carries on the business of a Peer to Peer Lending Platform. These guidelines are based on the Consultation Paper released by the Bank in April, 2016 in order to regulate P2P platforms as Non-Banking Financial Companies. Under the directions of the Bank, Non-Banking Financial Companies (hereinafter, NBFC) can act as an intermediary providing an online marketplace or platform for participants involved in P2P and it shall also be required to maintain and store all data with regard to its activities in hardware situated in India. Annexure 1 of the Masters Directions provides the mechanism for the fund transfer process on a P2P platform which involves a tripartite agreement between the lender, borrower and the trust. The trustee shall be responsible for the management of two accounts (escrow, maintained with a bank). The first account shall be used by the lender to deposit all the money for the specified borrower and the second account is to enable the borrower to make all its repayments, which shall be transferred to the lender.

The directions of the RBI also provide certain restrictions upon NBFCs i.e. NBFC-P2P cannot raise deposits or lend on its own and it is further precluded from permitting international flow of funds. In addition to this, NBFC-P2P cannot cross-sell any other products apart from loan specific insurance products and cannot provide any credit enhancement or credit guarantee. The prudential norms under the said directions state that the cumulative exposure of any lender to all borrowers across all P2P platforms shall not exceed a cap of INR 10 Lakhs and the maturity period of loans cannot exceed 36 months. And further, the exposure of a single lender to the same borrower across all P2P platforms cannot exceed INR 50,000. NBFCs seeking to work as P2P platforms are also required to obtain a certificate of Registration from the Bank, subject to a minimum net-owned fund of INR 2 crore. These directions have been enacted pursuant to the lack of regulatory framework which has led to very slow growth in the segment and this move by the Bank will also bring a legal clarity wherein the platform will have the rights to take legal action against defaulters.

"Existence of dispute" under Section 8 (2) (a) of the IB Code, 2016

The Supreme Court of India in its judgement dated on 21st September, 2017 in the case of Mobilox Innovations Private Limited v Kirusa Software Private Limited has laid down the principle of "plausible contention" to be implemented by the National Company Law Tribunal in cases of involving the question whether there is an 'existence of dispute' between the corporate debtor and creditor. It has further discussed the elements required to construe the "existence of dispute" under Section 8(2)(a) of the Insolvency and Bankruptcy Code, 2016 (hereinafter, IB Code) in the context of applications filed by a operational creditor for the initiation of corporate insolvency resolution process of corporate debtors. The term "dispute" is defined in Section 5(6) of the IB Code as "dispute includes a suit or arbitration proceedings relating to: (a) the existence of the amount of debt; (b) quality of goods or service; or (c) the breach of a representation or warranty"

Facts of the case:

Kurisa provided services relating to the conduct of tele-voting for a TV program. Pursuant to this the parties executed a non-disclosure agreement (hereinafter, NDA) under which Kirusa had certain confidentiality obligations towards Mobilox. When Kurisa raised invoices on 23rd December, 2016 against Mobilox for the payments for previous dues under Section 8(1) of the IB Code, Mobilox informed Kirusa that the payments were being withheld due to breach of NDA by Kirusa. Mobilox responded to the Demand Notice contending, inter alia, that there was a bona fide existence of a dispute between the parties. In pursuance of the same, NCLT, Mumbai held that Kurisa’s claim is liable to be dismissed on the ground that Mobilox had issued a valid Notice of Dispute. On Appeal, NCLAT overruled the previous decision stating that Mobilox's reply in the Notice of Dispute did not fall within the ambit of a dispute as contemplated under Section 5(6) or Section 8(2) of the IB Code. An appeal by Mobilox was preferred to the Supreme Court to decide upon the ambit of "existence of dispute" under the IB Code, 2016.

Interpretation by the Supreme Court

The Supreme Court pondered upon the question whether the word "and" contained in Section 8(2) of the IB Code is to be read as "or". The IB Code suggests that the "existence of a dispute" between the operational creditor and corporate debtor can only be contended if there is a suit or arbitration proceedings already pending before receipt of Demand Notice by the debtor. But the Supreme Court has noted that if the word "and" occurring under Section 8(2) (a) of the IB Code is not read as "or" then persons who would not have had sufficient time to approach a Court upon receiving "Notice of Demand" shall be excluded from the ambit of Section 8(2) of the IB Code, and corporate insolvency proceedings against such persons would be a given. Pursuant to this, the Supreme Court laid down the principle of "plausible contention" which means that the NCLT has to look into the question whether there is "a plausible contention which requires further investigation and that the "dispute" is not patently feeble legal argument or an assertion of the fact unsupported by evidence." Therefore, it has been held that even if no suit is pending or no arbitration proceedings is initiated at the time of receipt of demand notice by the debtor, in such cases, if the Court is of the believe that despite the absence of a suit, there is a "plausible contention" on the part of the debtor regarding the presence of a dispute then the Court shall hold such contention to be a valid contention within the ambit of Section 8(2) (a) of the IB Code.




6 October 2017
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