The Next Wave: Individual Insolvency In The Insolvency & Bankruptcy Code

The second most crucial reform in India's legal framework is the Insolvency and Bankruptcy Code. This is because the IBC not only makes India emphatically powerful in the area of the legal domain but also provides new identification and recognition at the global platform. The Insolvency and Bankruptcy Code, 2016 is India's bankruptcy law, which aims to combine the existing structure by creating a single insolvency and bankruptcy law. After taking important steps in corporate insolvency (including fast track resolution, corporate and voluntary liquidation), it is time now to chart the route for individual insolvency with clear phasing, sequencing, timing, and destination. Introduction "Bankruptcy is a legal proceeding in which you put your money in your pants pocket and give your coat to your creditors" - Joey Adams The Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as 'IBC') came into force with the idea of having an effective and adequate framework for insolvency and bankruptcy. The objective was to strengthen and amend the laws relating to the reorganization and insolvency resolution of corporations, partnership firms, and individual entities. The individual insolvency framework pursues the objectives enshrined in Part III of the Code. By a notification dated 15th November 2019, bearing Serial No. 4126 the Central Government has from the 1st of December, 2019 brought into effect Part III of the Insolvency and Bankruptcy Code, 2016 ("the Code") (save and except provisions dealing with the Fresh Start Process mainly set out in Chapter III)4 dealing with the Insolvency Resolution and Bankruptcy of Individuals and Partnership Firms in so far as it is applicable to Personal Guarantors of a Corporate Debtor. Erstwhile Framework Historically, banks granting loans would always require personal guarantees from promoters to guarantee their "skin in the game". Now that over-indebtedness has returned, the lack of an effective forum for enforcing personal guarantees, which goes hand in hand with the insolvency of the company for which the guarantee was given, has led legislators to adopt provisions relating to personal guarantees. Before the Code, the Presidency Towns Insolvency Act, 1909 (for individuals in 3 former cities of the presidency of Chennai, Kolkata, and Mumbai) and the Provincial Insolvency Act 1920 (for individuals in regions other than the cities of the presidency) governed the insolvency and bankruptcy of individuals.7 The operation of the old individual insolvency laws posed many problems, including the lack of a professional as well as a resolution professional to lead the insolvency process, no time-bound mechanism, and most importantly the whole process was led by the debtor with the little role as a creditor. A major drawback of the old individual insolvency laws was the lack of a pre-bankruptcy insolvency resolution process that was introduced by the Code with the fresh start process - which allows an individual to start his life over. The Code now enables rehabilitation and bankruptcy proceedings against personal guarantors, provided the corporate debtor is subject to pending insolvency or liquidation proceedings before the National Company Law Tribunal ("NCLT") ("Personal Guarantor"). Part III of the Code Part III of IBC is applicable to three categories of individuals. 1. Personal Guarantors to Corporate Debtors; 2. Individuals with partnership Firms or Sole Proprietorship; and 3. Other Individuals. This classification has come in light of the fact that each of these categories has separate individualities, unique features, and dynamics requiring a different treatment because of economic considerations. The Working Group on Individual Insolvency was of the opinion that a phased implementation of individual insolvency and bankruptcy is the intention of the legislature and a practical necessity and suggested that the provisions of the Code may first be notified for personal guarantors to corporate debtors. The remaining provisions of Part III of the Code applicable to the other categories of individuals may be notified in subsequent phases along with separate rules and regulations. Part III of the Code provides for three processes for individual insolvency resolution, on default of a threshold amount: (a) Fresh Start Process/Mechanism to Trigger: This mechanism is only available to those debtors who have an annual income less/equal to Rs. 60,000, assets less/equal to Rs. 20,000 debts less/equal to Rs. 35,000 and do not have a living unit. Only the debtor can file an application requesting for a fresh start to settle his debt. A resolution Professional (RP) scrutinizes the application and submits a report to the Adjudicating Authority (AA) within 10 days of his appointment, recommending that the request either be accepted or rejected. After examining the RP report, the AA is expected to issue an order, either by admitting or rejecting the request within 14 days from the date of submission of the report by the RP. If the application is admitted, the creditors have a chance to object to the process on limited grounds. At the end of the process, the AA passes an order for the discharge of the debtor or cancels the admission of the application. The discharge order annuls the unsecured debts allowing the debtors to start fresh, subject to an entry in the credit history. (b) Insolvency Resolution Process: This process provides a structure for the debtor and creditors to jointly renegotiate a repayment plan under the direction of an RP. An application for initiation of the insolvency process can be triggered either by a debtor or any creditor. If the AA admits the application, a public notice is issued inviting claims from all creditors. The debtor then prepares and submits his repayment plan for restructuring debts in consultation with the RP. The repayment plan has to be approved by the creditor committee or if the RP decides that no meeting is required it will need to justify the AA with an explanation. If the plan is approved by 75% of the voting shares of the creditors, and thereafter by the AA, the RP executes its application. On execution of the repayment plan, the AA issues an order discharging the debtor from its liability in terms of the plan, and the debtor gets an 'earned start'. (c) Bankruptcy Process: Ultimately, if a repayment plan is not approved or is not implemented, the debtor or creditor may make an application for the initiation of the bankruptcy process.15 If the application is admitted, the AA passes a bankruptcy order and assigns a bankruptcy representative, followed by an invitation of claims from creditors. The bankruptcy representative examines the affairs of the bankrupt, realizes the property of the bankrupt and distributes the proceeds in accordance with the priority provided in Section 53 of the Code (that governs the liquidation of a corporate debtor). He submits a report of the administration of the property of the bankrupt to the committee of creditors for approval. On the expiry of one year from the bankruptcy commencement date or within seven days of the approval by the committee of creditors the bankruptcy, representative applies for a discharge order and the AA passes a discharge order. This discharge order released the debtor from the bankruptcy debt. The bankruptcy, however, suffers certain disabilities during the period of the bankruptcy process. Individual Insolvency and Corporate Insolvency - Individual Insolvency outline differs from that of Corporate Insolvency based on several factors: Corporates are non-natural persons with a broadly uniform structure. The code provides a uniform process for the resolution of their insolvency. However, it categorizes individuals into three kinds and expects customized processes for the resolution of each of the categories. There is no automatic debt relied upon in the case of corporate entities. However, the fresh-start process under Individual insolvency offers automatic debt relied on a set of debtors. A corporate entity can be liquidated or sold in bits and pieces. The individual cannot, however, be sold or liquidated. A corporate entity can be liquidated or sold in bits and pieces. However, it is not the case of Individual insolvency. Commencement of liquidated is automatic on the failure of the corporate resolution process. However, it is not the case of Individual insolvency. The National Company Law Tribunal is the AA in case of Corporate Insolvency and The Debt Recovery Tribunal is the AA for Individual Insolvency.18 The minimum amount of default for initiating the Corporate Insolvency Resolution process is Rs. 1,00,000/-. The threshold for initiating the insolvency process against an individual is Rs. 1000/-, which now has been revised up to Rs. 1,00,000 by Central Government. Conclusion: The rules and regulations on insolvency and bankruptcy of a Personal Guarantor is the first step regarding operational zing personal insolvency under the Code and for holding promoters accountable for the debt pile up. There are numerous advantages; (i) it safeguards that the creditors do not have to go to various forums to recover their debt; (ii) it will produce better and more time-bound results for lenders; (iii) the fear of bankrupt promoters not being able to travel abroad without prior permission together with the many disqualifications, is intended to inculcate a repayment culture and discipline amongst borrowers. Having said we predict that the practicalities of the problems that will arise will undoubtedly lead to multiple future amendments as well as burden the already over-worked NCLTs with an even higher workload. It is hoped that the impact and result of the new scheme on promoter borrowers will soon become visible. As said by Mr. M.S Sahoo, IBBI chief, "Personal insolvency framework will be the "beginning of a new learning" and the next big thing in insolvency reforms.

[Authour: Preeti Ahluwalia, Advocate]