Individual bankruptcy: Draft rules propose mediation over litigation

The government is fine-tuning the draft rules for individual insolvency and is likely to introduce three categories of debt resolution based on the loan amount, a senior official told Business Standard. The focus, the official added, would be on resolution through mediation in most cases. 

“The current draft (for individuals) imitates the corporate insolvency procedures, which seems a bit disproportionate to the defaulter. We need to correct that,” the official said.

The entry-level debt of up to Rs 35,000 will not have to go through any adjudication process, with the ministry of corporate affairs (MCA) planning to put an online mechanism under “fresh start” for resolving such loans. The MCA is mulling two more slabs — Rs 35,000 to Rs 10 lakh and above Rs 10 lakh — which will have the option of both compulsory and voluntary mediation, failing which the matter will be referred to the Debt Recovery Tribunal (DRT).   

For the first time in India, debtors and operational creditors will be able to trigger insolvency once the individual insolvency code is notified.

Those with debt up to Rs 35,000 and having no asset or income are likely to get a waiver. The move will affect a large chunk of the unorganised sector, small borrowers and entrepreneurs.

“Law as it stands today is a bit too cumbersome. We have identified changes that need to be made. The current law will require significant tweaking,” the official quoted above said.

According to the current mechanism, while corporate debtors approach the National Company Law Tribunal (NCLT) for bankruptcy and insolvency resolution, individual insolvency cases are referred to DRTs. Over 100,000 cases are pending in DRTs.

“The existing system is out of date. The new rules will help banks better assess the credit risk. The major challenge will be to make the process easy and cost-effective,” said an industry expert.

The government is hoping that a majority of individual cases get resolved in the pre-litigation stage through conciliation and mediation. DRTs too have been asked not to put the individual insolvency cases in the queue.

“As firms are undergoing insolvency, promoters are also getting insolvent. Both processes have to be undertaken simultaneously,” said Manoj Kumar, partner, Corporate Professionals.

The policy will be implemented in phases. The focus in the first phase is likely to be on individuals who are guarantors to corporates undergoing the resolution process, said officials.

The IBBI has formed a working group to recommend the strategy and approach for the implementation of provisions relating to insolvency and bankruptcy of individuals and partnership firms, under Part III of the Insolvency and Bankruptcy Code, 2016.

In the offing

Individual insolvency rules will be notified soon, to be implemented in phases 

'Fresh start' for debt up to Rs 35,000

| Online and non-adjudicative process

| No asset, no income debtors to get a loan waiver

Higher debt of Rs 10 lakh and above

| Option of compulsory and voluntary mediation

| Govt to encourage conciliation over litigation

| Debt recovery tribunals the final resort