In the fall of 2019, the MCA notified provisions dealing with Insolvency and Bankruptcy for Personal Guarantors to Corporate Debtors present in Part III of the Insolvency and Bankruptcy Code, 2016. The overarching Code is slowly increasing its hold in the Indian Credit Market and soon it will take over the dilapidated framework for Personal Insolvency and Bankruptcy in India. As the existing scholarship prominently suggests that a new Personal Insolvency regime was neither planned nor intended but it was a consequential result of the process of overhauling the Corporate regime. Although there isn’t a vast difference between the Corporate or the Individual regime. However, after four years of a successful response, it is pertinent to analyse the backdrops in the corporate framework in order to avoid the same in future. We have analysed the provisions for Individual Insolvency and Bankruptcy regime and in our understanding have pointed out the drawbacks that the novel regime might be prone to. For a successful implementation, it is pertinent that the following points raised shall be effectively considered.
Brief outlook of Part III of Insolvency and Bankruptcy Code, 2016
(i) Mandatory Pre-Insolvency Route
Much like the provisions of the Corporate regime, the provisions for personal insolvency also provide a mandate in the form of a pre-insolvency meaning that it is not possible for a creditor of an individual to file directly for bankruptcy and he/she will have to necessarily go through the insolvency process. The point that merits consideration in the present case is that while choosing this process for the Corporate regime, the framers were well aware of the need for the importance of corporate houses and the involvement of numerous stakeholders. That is the sole reason that they were skewed to take a ‘going concern’ approach rather than providing the leeway to the creditors to directly file for bankruptcy. However, in the case of individuals, this reasoning falls short of any justification as firstly unlike the corporate houses the process of individuals does not involve numerous stakeholders and secondly and more importantly the mandatory pit stop of insolvency drastically increases the chances for deterioration of assets and their values. Till the process reaches the bankruptcy stage, it is possible that the recoveries might reduce substantially in comparison to what would have been possible at the inception of this process.
(ii) Inter Creditor Conflicts
Unlike the Corporate regime, the provisions pertaining to the individual regime do not provide a proper watershed mechanism for the distribution of recoveries to the creditors. Although the bankruptcy process provides a vertical waterfall mechanism, there is no clarity on the horizontal classification of these creditors. For example, if more than one creditor falls under the same head vertically then it will lead to ambiguity as the provisions do not provide for a solution in such a case. This lacuna if left unaddressed might in the future become a cause for inter-creditor conflicts and can subsequently affect the strict timeline mentioned in the code.
(iii) Too low thresholds for Fresh Start Process
FSP’s are surely a new and advanced approach for dealing with cases of small debtors. Much like the Debt Relief Orders in the UK the MCA has made sure to introduce this mechanism which can be used as a substitute for loan waiver programs. To curb the fraudulent benefits attained by some notorious individuals, this process involves a thorough regulation of individuals involved with loan waivers. However, a drawback lies in the fact that the thresholds set under the Fresh Start Process will not suffice the present test of times as they are based on outdated numbers. These thresholds have been designed using the Deprivation Index, SECC, 2011 as well as the Key Indicators of Debt and Investment in India for 2013. Therefore, on the enforcement, the set thresholds for the FSP need to be revisited in order to attain the objective of the process.
The provisions of the Code do not provide any information on the costs of the process including the fees of the Resolution Professionals, administrational and infrastructural costs etc. However, it is expected to be introduced by the following rules and regulations once the provisions are notified. One thing that is to be kept in mind while notifying concerned rules and regulations is the fact that unlike the corporate regime, the process for insolvency and bankruptcy for individuals does not involve as large a sum as in the former case. This becomes an important factor while addressing the concern of the costs of the process. It is therefore required that the costs and the fees to be prescribed in the future are done in accordance with the sums involved. Otherwise, it might act in deterrence to the objective of the concerned approach.
(v) Excessive discretion to the Debt Recovery Tribunals
The provisions for individual regimes provide additional responsibilities to the DRT’s. They are not only supposed to be umpires unlike in the corporate insolvency regime but herein they are required to take an active part in addition to the adjudication process. The arbitration regime should act as a guiding beacon in the present case wherein the Courts have, over the course of years, diminished their roles and interference in the arbitration proceedings and substantially further the pro-arbitration era. This has led to furtherance of the intention of law-makers and has established a conducive environment for future arbitrations in India. Therefore, the powers and contours of their jurisprudence shall be decisively defined in order to limit their approach. This is essential if the Indian Credit market is to reap the benefits as foreseen by the law-makers and consecutively provide a robust framework for recoveries from individuals. The concerned provisions under the present Code when and if enacted shall be accompanied by a restrictive set of rules and regulations prescribing the role of DRT’s and preventing it from relying on the adversarial adjudication process.
(vi) Framework of the Tribunals
DRT’s were established with an aim to provide a speedy mechanism for recovery of debts. However, presently along with the number of DRTs the internal mechanism of these institutions is a point of concern as well.
The number of functioning DRT’s at present in our country is significantly disproportionate to the need of the hour. Presently, there are five DRATs and thirty-nine DRTs in the country. In addition to this, there is only one presiding officer appointed for each DRT, which successfully proves the colossus of backlog cases. As of June 2018, there were 38,376 cases pertaining to debt of 10-20 lakhs pending, which accounts for only 34 percent of total cases. Therefore, the need to increase the workforce of these institutions is mandatory if the institution is to be armed for dealing with the prospective soaring cases once the provisions for individual insolvency are notified. The increased force should at least have three presiding members, an individual having knowledge of insolvency and banking laws, an imminent with a judicial background and a person of high social repute.
Additionally, one more reason responsible for the heaping backlog of cases is the additional burden that is placed upon these Tribunals. The already burdened tribunals are constantly required to perform extraneous administrative functions. Therefore, to ensure the smooth functioning of the insolvency and bankruptcy process and adhering to the time limits prescribed in the Code, it is essential that dedicated agencies to outlook the administrative tasks be set up in order to bolster such tribunals and avoid any wastage of time.
(vi) Ambiguity in recoveries
The predictability of recoveries acts as a key factor in asserting the future response from the stakeholders. For enactment of this sort, it is important for it to be overarching and to provide a level of uniformity and clarity to the creditors. Only then the creditors would be willing to voluntary participate in the new process. Interestingly, the recoveries under the new Code are based on the repayment plan which is required to be formulated solely by the debtor with the help of the RP. Too much dependency on the repayment plan and the subjectivity of the debtor might create ambiguity over the recoveries of the creditors leading to an uncertain environment. This grey area might discourage some creditors from voluntarily participating in the 2016 Code.
Indian Credit Market is volatile and is prone to unprecedented and unforeseen changes. The IBC, 2016 has proved to be a success and completed several recoveries in a time-bound manner successfully. However, one thing that needs to be kept in mind is the checks and balances approach which was adopted while dealing with the arbitration and IBC provisions for corporate entities. This approach has made the enactments more amenable to the vibrant nature of our credit market. Like the other Codes, the provisions for individual insolvency and bankruptcy will also be required to such amendments in order for it to be suitable to the Indian Credit Market. It is pertinent that the legislature learns from the mistakes of the past and follows a practical approach instead of a literal approach so that the concerns addressed above are attended. There might be many more areas where the wisdom of the Legislature would be required to undergo scrutiny; however, a prima facie reading of these provisions and the learnings from the corporate regime shall certainly form a pillar in the creation of the larger structure
Preferred Citation: Ahuja, M; Upadhyay, A “Individual Insolvency: Need for Robust Mechanism”, The Law Culture (2020)