Background of Individual Insolvency Law in India

Before the British came to India, there was no insolvency law in India. The Indian regulation that dealt with insolvency law was initially found in Government of India Act, 1800. In 1828, a statute was passed which marked the beginning of special insolvency legislation in India and the statute applied to Presidency towns namely Bombay, Madras and Calcutta.

It was originally meant to be in force for a period of four years but was extended till 1843. In 1848 another statute of insolvency law namely the Indian Insolvency Act, 1848 was passed which made a distinction between traders and non-traders. Insolvency jurisdiction under the statute was transferred to High Courts. Its jurisdiction was also limited to presidency towns. In 1909 the present Presidency Towns Insolvency Act, 1909 was passed.

Later, the Provincial Insolvency Act, 1907 was passed which was repealed by present Provincial Insolvency Act, 1920. Then, in 2016, Insolvency and Bankruptcy Code, 2016 (the Code) was passed in order to deal with the increasing level of Non-Performing Loans in India, in a better way.

The parts in the Code, which deal with individual insolvency matters are yet to be notified. However, the Central Government vide gazette notification dated 15.11.2019[1] specified that the provisions of this part that relate to the Personal Guarantors to the Corporate Debtors shall come into effect from 01.12.2019, save and except provisions dealing with the Fresh Start Process.

Earlier the individual insolvency framework was primarily governed under two acts, namely, the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920. These acts had parallel provisions and their substantial content was also similar but the two differed in respect of their territorial jurisdiction. While Presidency Towns Insolvency Act, 1909 applied in presidency towns namely, Kolkata, Mumbai and Chennai, the Provincial Insolvency Act, 1920 applied to all provinces of India.

The Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920 law allow an application to be filed either by the creditor or the debtor, to initiate insolvency proceeding, if the debtor is unable to pay his, debts amounting to five hundred rupees. In case of a petition by a creditor, he had to show that the insolvent had committed an act of insolvency which included the debtor alienating his property to a third person, taking action to defeat or delays his creditors filing a petition for insolvency, failing to respond to a creditor's notice of insolvency, etc. within three months before the presentation of the petition.

Issues and challenges faced in the Individual Insolvency Framework

There were many issues and challenges that were faced in the working and implementation of the individual insolvency framework. Some of them include:

• The old insolvency laws had become outdated and dormant

  The legal framework dealing with individual insolvency was rooted in century old laws and there were no substantial changes made to these laws over these years, thus, this framework proved to be largely ineffective and these acts were considered inadequate and outdated. Further, the paucity of case laws dealing with these acts shows that these acts were used very rarely and had turned dormant in practise.
  
  The Code was enacted with a view to increase the effectiveness and efficiency of the insolvency laws in India. The provisions of the Code are framed as per the situation of the Indian credit market and hence, are up to date.
   

• The procedures of insolvency under the old acts were complicated and time consuming

  This was one of the major reasons for the set back of these acts. These acts prescribed that the procedures provided under the Civil Procedure Code, 1908 shall be followed for the proceedings under the acts. This caused delays in the whole process. Further, high intervention of the court prescribed under these laws made it a less attractive mode of recovery of debt for the creditors.
  
  As a result, these acts were very rarely used by the creditors as a mode of recovery of their loan or debt. The creditors preferred other modes of recovery of their money which were easy and less time consuming like out of court settlement methods which resulted in partial or no recovery at all, or the Negotiable Instruments Act, 1881 which could be used only in cheque bounce cases. A large category of creditors in turn found themselves with no effective mechanism for recovery at all. These ineffective legal procedures led to creditors using intimidating tactics to recover their loans.
  
  The insolvency procedures under the Code are comprehensive and time-bound. Further, the Code prescribes limited intervention of the adjudicating authorities which is aimed at reducing the time that is wasted in unnecessary litigations. The Code also provides for fast track procedures to be used in appropriate cases.
   

• Restricted ambit for filing insolvency petition against the debtor

  Under the old insolvency acts the scope of filing of insolvency petition by a creditor was very limited. A creditor could file an insolvency petition against the debtor only on grounds specified in the act. This further discouraged the creditors from having a recourse through these old insolvency acts.
  
  On the other hand, under the provisions of the Code, a creditor can file an application against a debtor n the event of inability of the debtor to repay the loan or debt.
   
• No provisions for participation of the creditors and debtor
  The old insolvency acts lack provisions for participation of the creditors and the debtor. For a successful resolution and maximisation of the value of their assets, it is necessary that both the creditors and the debtor are allowed to participate and negotiate with each other.
  
  The Code contains adequate provisions for the meeting of the creditors where they can negotiate the terms of the resolution plan and arrive at a mutually acceptable resolution for the debtor.
   

• Weak credit recovery

  This ineffective insolvency regime also resulted in very low credit recovery which had an adverse impact on the Indian credit market. Credit markets are important from the perspective of economic growth and insolvency laws play an important role in facilitating the growth of credit markets.
  
  It was thus felt that there is a need to bring a reform in the insolvency laws. This led to the enactment of Code which was essentially passed in order to deal with the increasing level of Non-Performing Loans in India, in a better way.
   

• No separate provision for Bankruptcy of the individual

  The old insolvency acts only provide for insolvency of the individual. These acts do not contain any separate provision for the bankruptcy of the individual.
  
  On the other hand, the Code contains separate and elaborate provisions for both insolvency and bankruptcy of the individual. This enables both the creditor and the debtor to maximise the value of their assets.
   

• There was no separate adjudicating authority dealing specifically with insolvency matters

  The effectiveness of these laws was further hampered by the inefficiency of the Indian judicial system. The jurisdiction to try insolvency matters was vested with the district courts under these acts. Since, there was no separate adjudicating authority dealing specifically with insolvency matters, the whole process became more time consuming because of slow functioning of the courts. This was on account of the “quantity” of judges, as well as the “quality” of the process wherein a large proportion of the judge’s time was spent in administrative matters leaving little time for judicial decisions. The quantity aspect assumes more importance in personal insolvency as it is expected that people from all parts of the country should be able to access the system. Therefore, weak institutional infrastructure posed another challenge in the implementation of the legal framework dealing with individual insolvency.
  
  On the other hand, under the framework of the Code, the jurisdiction is vested with the National Company Law Tribunal and National Company Law Appellate Tribunal. Additional measures are also taken by the Government of India to improve the institutional infrastructure for efficient and effective implementation of the Code.
   

• Absence of a unified insolvency law

  Another issue with the previous insolvency regime was that there was no separate unified insolvency law covering all the aspects of insolvency in one place. Further, there were a lot of state amendments made to the insolvency acts dealing with individual insolvency matters which further made it complicated for the creditors, who are spread all over the country, to resort to these laws.

Thus, having a unified insolvency Code was considered to be a need of the hour, which led to enactment of the Code. This Code has consolidated all the laws related to insolvency at one place.

Critical appreciation of the Code

The Code has brought a huge development in the insolvency law regime in India, however, there are certain issues in the provisions dealing with individual insolvency in the Code that are yet to be notified, which needs to be addressed for a successful insolvency resolution. Some of these are:

• The eligibility threshold for filing insolvency application is low
  As per the provisions of the Code, either the debtor or the creditor can file an insolvency application if the amount of the default is not less than one thousand rupees. This would imply that on a single default of one thousand rupees, a debtor could be brought under insolvency. This would result in huge number of insolvency cases being filed with the Debt Recovery Tribunal (DRT) even for the default of small amounts.
   
• Weak institutional infrastructure
  Unlike corporate insolvency, in case of individual insolvency the Code provides that the DRT will have the jurisdiction to entertain the cases of individual insolvency. Since, the DRT is already overburdened with large number of pending cases there is a need for a separate authority to be set up for matters of individual insolvency, so that these matters can be dealt with in efficient and effective manner.
   
• Wider role of DRT in the insolvency process
  The role of DRT is wider in these cases as the Code provides for the requirement of approvals from DRT at various stages of the process. Since, the DRT is already overburdened with cases, this would make the process slow and time consuming. Because of this there is an apprehension that these matters may also go the way NI Act matters are proceeding in civil courts. This may adversely affect the success of individual insolvency regime provided under the Code.

The old individual insolvency law regime was rarely used by both the creditors and the debtor because of the above-mentioned shortcomings in the legal framework. The Code was enacted with the objective of over-coming these shortfalls and strengthening the Indian credit market.

Individual Insolvency under the Code

The Code has been brought into force in order to consolidate and amend the laws relating to restructuring and insolvency resolution of companies, partnership firms and individuals. The Code is divided into VI Parts.

While the provisions of Part I and Part II of the Code were brought into effect from 01.12.2016, the provisions of Part III of the Code, which applies to matters relating to fresh start, insolvency and bankruptcy of individuals and partnership firms where the amount of the default is not less than one thousand rupees[2], were not notified. The Central Government vide gazette notification dated 15.11.2019 specified that the provisions of this part that relate to the Personal Guarantors to the Corporate Debtors shall come into effect from 01.12.2019, save and except provisions dealing with the Fresh Start Process.

Part III of the Code is applicable to the following categories of individuals:

1. Personal Guarantors to Corporate Debtors;
2. Partnership Firms, and
3. other Individuals.

The Code provides two kinds of processes for insolvency of individuals:

1. Fresh Start Process[3]
2. Insolvency Resolution Process[4]
   

Fresh Start Process
A debtor, who is unable to pay his debt, is entitled to make an application to the Adjudicating Authority (AA), either personally or through a resolution professional (RP), for a fresh start for discharge of his qualifying debt[5] if he fulfils the following conditions[6]:

1. the gross annual income of the debtor does not exceed sixty thousand rupees;
2. the aggregate value of the assets of the debtor does not exceed twenty thousand rupees;
3. the aggregate value of the qualifying debts does not exceed thirty-five thousand rupees;
4. he is not an undischarged bankrupt;
5. he does not own a dwelling unit, irrespective of whether it is encumbered or not;
6. a fresh start process, insolvency resolution process or bankruptcy process is not subsisting against him; and
7. no previous fresh start order has been made in relation to him in the preceding twelve months of the date of the application for fresh start.

After an application is filed by a debtor for a fresh start, an interim-moratorium shall commence on the date of filing of the said application in relation to all of his debts. It shall cease to have effect on the date of admission or rejection of such application as the case may be.[7]

If the said application is filed by the debtor himself, the AA shall within seven days of the receipt of an application, direct the Board to nominate a RP for the fresh start process and if the said application is filed by the debtor through a RP, the AA shall within seven days of the receipt of an application, direct the Board to confirm that there are no disciplinary proceedings against the RP.[8]

The RP shall examine the said application within ten days of his appointment, and submit a report to the AA, either recommending acceptance or rejection of the application.

The RP shall reject the application, if in his opinion:

1. the debtor does not satisfy the conditions specified under section 80; or
2. the debts disclosed in the application by the debtor are not qualifying debts; or
3. the debtor has deliberately made a false representation or omission in the application or with respect to the documents or information submitted.[9]

The AA may within fourteen days from the date of submission of the report by the RP, pass an order either admitting or rejecting the said application.[10]

If the application is admitted, the moratorium period shall commence in relation to all debts and shall cease to have effect at the end of the period of one hundred and eighty days beginning with the date of admission of the application. During the moratorium period any pending legal proceeding in respect of any debt shall be deemed to have been stayed and the creditors shall not initiate any legal proceedings in respect of any debt.

During the moratorium period, the debtor shall[11]:

1. not act as a director of any company, or directly or indirectly take part in or be concerned in the promotion, formation or management of a company;
2. not dispose of or alienate any of his assets;
3. inform his business partners that he is undergoing a fresh start process;
4. be required to inform prior to entering into any financial or commercial transaction of such value as may be notified by the Central Government, either individually or jointly, that he is undergoing a fresh start process;
5. disclose the name under which he enters into business transactions, if it is different from the name in the said application;
6. not travel outsides India except with the permission of the AA.

Any creditor mentioned in the order of the AA passed under section 84, to whom a qualifying debt is owed, may, within a period of ten days from the date of receipt of the said order, file an objection by way of an application to the RP only on the ground of inclusion of a debt as a qualifying debt or incorrectness of the details of the qualifying debt specified in the order. The RP shall examine the objections and either accept or reject them, within ten days of the date of the application.[12]

The debtor or the creditor who is aggrieved by the decision taken of the RP, may, within ten days of such decision, make an application to the AA challenging the same.[13]
The RP shall prepare and submit a final list of qualifying debts to the AA at least seven days before the moratorium period comes to an end. The AA shall pass a discharge order at the end of the moratorium period for discharge of the debtor from the qualifying debts.

The AA shall also discharge the debtor from the following liabilities:

1. penalties in respect of the qualifying debts from the date of application till the date of the discharge order;
2. interest including penal interest in respect of the qualifying debts from the date of application till the date of the discharge order; and
3. any other sums owed under any contract in respect of the qualifying debts from the date of application till the date of the discharge order.

The discharge order shall not discharge the debtor from any debt and from any liability not included in the discharge order. Also, a discharge order shall not discharge any other person from any liability in respect of the qualifying debts.[14]

The RP may submit an application to the AA seeking revocation of its order passed under section 84 on the following grounds:

1. if due to any change in the financial circumstances of the debtor, the debtor is ineligible for a fresh start process; or
2. non-compliance by the debtor of the restrictions imposed under section 85; or
3. if the debtor has acted in a mala fide manner and has wilfully failed to comply with the provisions of this Chapter.

The AA shall, within fourteen days of the receipt of the said application, either admit or reject the application and on passing of the order admitting the said application, the moratorium and the fresh start process shall cease to have effect.[15]

Insolvency Resolution Process
The insolvency resolution process may be initiated by the debtor[16] or the creditor[17], by making an application to the AA, either personally or through a RP.

A debtor shall not be entitled to make the said application if he is[18]:

1. an undischarged bankrupt;
2. undergoing a fresh start process;
3. undergoing an insolvency resolution process; or
4. an application for insolvency resolution process has been admitted in respect of the debtor during the period of twelve months preceding the date of submission of the said application.

On filing of the said application, an interim-moratorium shall commence in respect of all the debts and shall cease to have effect on the admission or rejection of the application.[19]

If the said application is filed by the debtor or the creditor himself, as the case may be, the AA shall within seven days of the receipt of an application, direct the Board to nominate a RP for the insolvency resolution process and if the said application is filed through a RP, the AA shall within seven days of the receipt of an application, direct the Board to confirm that there are no disciplinary proceedings against the RP.[20]

The RP shall examine the said application, as the case may be, within ten days of his appointment, and submit a report to the AA recommending for approval or rejection of the application.[21]
The AA shall, within fourteen days from the date of submission of the report by the RP, pass an order either admitting or rejecting the said application. If the application is rejected by the AA, on the basis of report submitted by the resolution professional or that the application was made with the intention to defraud the creditors or the RP, the creditor is entitled to file for a bankruptcy order.[22]

If the said application is admitted, a moratorium shall commence in relation to all the debts and shall cease to have effect at the end of the period of one hundred and eighty days beginning with the date of admission of the application or on the date the Adjudicating Authority passes an order on the repayment plan[23], whichever is earlier. During the moratorium period, any pending legal proceeding in respect of any debt shall be deemed to have been stayed, the creditors shall not initiate any legal proceedings in respect of any debt and the debtor shall not transfer, alienate, encumber or dispose of any of the assets or his legal right or beneficial interest therein.[24]

The AA shall, within seven days, issue a public notice inviting claims from all creditors to be submitted within twenty- one days of such notice.[25] The creditors shall also register their claims with the RP[26] and the RP shall prepare a list of creditors within thirty days from the date of the notice[27].

The debtor shall prepare a repayment plan containing a proposal to the creditors for restructuring of his debts or affairs, in consultation with the RP.

The repayment plan may authorise or require the RP to[28]:

1. carry on the debtor's business or trade on his behalf or in his name; or
2. realise the assets of the debtor; or
3. administer or dispose of any funds of the debtor.

The RP shall submit the repayment plan along with his report on such plan to the AA within a period of twenty-one days from the last date of submission of claims by creditors. The report shall also specify the date on which, and the time and place at which, the meeting of the creditors should be held if he is of the opinion that a meeting of the creditors should be summoned.[29]
The RP shall issue a notice calling the meeting of the creditors at least fourteen days before the date fixed for such meeting.[30] In the meeting of the creditors, the creditors may decide to approve, modify or reject the repayment plan.

The RP shall ensure that if modifications are suggested by the creditors, consent of the debtor shall be obtained for each modification.[31]

A creditor shall be entitled to vote at every meeting of the creditors in respect of the repayment plan in accordance with voting share assigned to him. A creditor shall not be entitled to vote in respect of a debt for an unliquidated amount.

Also, a creditor shall not be entitled to vote in a meeting of the creditors if he is not a creditor mentioned in the list of creditors or if he is an associate of the debtor.[32] A secured creditor participating in the meetings of the creditors and voting in relation to the repayment plan shall forfeit his right to enforce the security during the period of the repayment plan in accordance with the terms of the repayment plan.[33]

The repayment plan or any modification to the repayment plan shall be approved by a majority of more than three-fourth in value of the creditors present in person or by proxy and voting on the resolution in a meeting of the creditors.[34]

The RP shall prepare a report of the meeting of the creditors on repayment plan[35] and shall provide a copy of the said report to the debtor, the creditors and the AA.[36]

The AA shall, by an order, approve or reject the repayment plan on the basis of the report of the meeting of the creditors submitted by RP under section 112 and where a meeting of creditors is not summoned, the AA shall pass an order on the basis of the report prepared by the RP under section 106. The order of the AA, approving the repayment plan may also provide for directions for implementing the repayment plan.

Where the AA is of the opinion that the repayment plan requires modification, it may direct the RP to re-convene a meeting of the creditors for reconsidering the repayment plan.[37] Where the AA rejects the repayment plan, the debtor and the creditors shall be entitled to file an application for bankruptcy.[38]

The RP shall supervise implementation of the repayment plan[39] and shall submit a completion notice and report, within fourteen days of the completion of the repayment plan, to the to the persons who are bound by the repayment plan and to the AA.[40]

On the basis of the repayment plan, the RP shall apply to the AA for a discharge order in relation to the debts mentioned in the repayment plan and the AA may pass such discharge order. The repayment plan may provide for an early discharge or discharge on complete implementation of the repayment plan.[41]

If a repayment plan comes to an end prematurely (i.e. it has not been fully implemented in respect of all persons bound by it within the period as mentioned in the repayment plan), the RP shall submit a report to the AA and the AA shall pass an order on the basis of the said report that the repayment plan has not been completely implemented. The debtor or the creditor, whose claims under repayment plan have not been fully satisfied, shall be entitled to apply for a bankruptcy order.[42]
On failure of the aforementioned a bankruptcy process[43] can be initiated.

Thus, a bankruptcy process can be initiated in the following three circumstances:

1. on the rejection of application for insolvency resolution process;
2. on rejection of repayment plan; and
3. on premature ending of the repayment plan.

Conclusion
The Code is considered to be one of the most important reforms for India. Before the enactment of the Code, there were a number of legislations and adjudicating authorities governing and regulating the insolvency and bankruptcy of companies, LLPs, partnership firms, sole proprietorships and individuals. The multiple, over lapping legislations dealing with the insolvency and bankruptcy matters caused huge confusions and hindrance in resolution of stressed entities.

Since these legislations were archaic and not in line with the global standards, they were not providing timely and effective remedy to creditors for recovering their debts. This led to increase in stressed assets causing undue strain on the Indian credit market.

To overcome these critical issues, the Code was enacted with a view to consolidate the laws dealing with insolvency and bankruptcy to provide for a time bound resolution of stressed assets and promote ease of doing business in India. These developments are likely to be fruitful in dealing with insolvency and bankruptcy matters in India, in an effective and efficient manner.

End-Notes:

1. http://www.mca.gov.in/Ministry/pdf/BankruptcyRulesPGCD_15112019.pdf
2. Section 78, Insolvency and Bankruptcy Code, 2016
3. Chapter II- Part III, Insolvency and Bankruptcy Code, 2016
4. Chapter III- Part III, Insolvency and Bankruptcy Code, 2016
5. Section 79 (19), Insolvency and Bankruptcy Code, 2016, states- “qualifying debt” means amount due, which includes interest or any other sum due in respect of the amounts owed under any contract, by the debtor for a liquidated sum either immediately or at certain future time and does not include – (a) an excluded debt; (b) a debt to the extent it is secured; and (c) any debt which has been incurred three months prior to the date of the application for fresh start process;
6. Section 80, Insolvency and Bankruptcy Code, 2016
7. Section 81, Insolvency and Bankruptcy Code, 2016
8. Section 82, Insolvency and Bankruptcy Code, 2016
9. Section 83, Insolvency and Bankruptcy Code, 2016
10. Section 84, Insolvency and Bankruptcy Code, 2016
11. Section 85, Insolvency and Bankruptcy Code, 2016
12. Section 86, Insolvency and Bankruptcy Code, 2016
13. Section 87, Insolvency and Bankruptcy Code, 2016
14. Section 92, Insolvency and Bankruptcy Code, 2016
15. Section 91, Insolvency and Bankruptcy Code, 2016
16. Section 94, Insolvency and Bankruptcy Code, 2016
17. Section 95, Insolvency and Bankruptcy Code, 2016
18. Section 94(4), Insolvency and Bankruptcy Code, 2016
19. Section 96, Insolvency and Bankruptcy Code, 2016
20. Section 97, Insolvency and Bankruptcy Code, 2016
21. Section 99, Insolvency and Bankruptcy Code, 2016
22. Section 100, Insolvency and Bankruptcy Code, 2016
23. Section 79 (20), Insolvency and Bankruptcy Code, 2016, states- “repayment plan” means a plan prepared by the debtor in consultation with the resolution professional containing a proposal to the committee of creditors for restructuring of his debts or affairs.
24. Section 101, Insolvency and Bankruptcy Code, 2016
25. Section 102, Insolvency and Bankruptcy Code, 2016
26. Section 103, Insolvency and Bankruptcy Code, 2016
27. Section 104, Insolvency and Bankruptcy Code, 2016
28. Section 105, Insolvency and Bankruptcy Code, 2016
29. Section 106, Insolvency and Bankruptcy Code, 2016
30. Section 107, Insolvency and Bankruptcy Code, 2016
31. Section 108, Insolvency and Bankruptcy Code, 2016
32. Section 109, Insolvency and Bankruptcy Code, 2016
33. Section 110(2), Insolvency and Bankruptcy Code, 2016
34. Section 111, Insolvency and Bankruptcy Code, 2016
35. Section 112, Insolvency and Bankruptcy Code, 2016
36. Section 113, Insolvency and Bankruptcy Code, 2016
37. Section 114, Insolvency and Bankruptcy Code, 2016
38. Section 115(2), Insolvency and Bankruptcy Code, 2016
39. Section 116, Insolvency and Bankruptcy Code, 2016
40. Section 117, Insolvency and Bankruptcy Code, 2016
41. Section 119, Insolvency and Bankruptcy Code, 2016
42. Section 118, Insolvency and Bankruptcy Code, 2016
43. Chapter IV & V- Part III, Insolvency and Bankruptcy Code, 2016

Written By: Vanshika Gupta, 5th Year Students, BBA LLB, Vivekananda Institute of Professional Studies, GGSIPU