 "Shamed can start afresh")
Individual borrowers and consumers can take heart from a couple of key provisions in the Insolvency and Bankruptcy Code Bill passed by Parliament - the provision to start their lives afresh after being declared bankrupt. They also will have the option of initiating the insolvency resolution process on their own, under certain circumstances. And now, disputes under this would be resolved by Debt Recovery Tribunal, not district courts.
This is a marked difference from the existing laws governing individual bankruptcy. The current laws governing insolvency of individuals are contained in two separate enactments, that is, Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920. The difference is that these laws do not provide for pre-bankruptcy insolvency resolution process or an opportunity of fresh start to individuals by an order of discharge as in case of the Code. It simply provides for liquidation of estate of an individual bankrupt. "As opposed to that, the fresh start process under the Code is a new concept which allows a person to get a fresh start to life," says Misha, partner, Shardul Amarchand Mangaldas.
The insolvency resolution process is useful if an individual wants to discharge all his current liabilities under a systematic and controlled manner. The process will save an individual from separate recovery harassment from different creditors, points out Ankur Kedia, associate director - deals, PwC India. The new Code provides for Insolvency Resolution Professionals (IRPs), who will play an important role during the process and in the formation of Information Utilities, not there in the previous legislations.
Tax experts are happy with both these changes because unlike a company, there is a huge stigma around insolvency for individuals, which can impact their personal lives.
But, the Code also does not allow the individual to escape easily. The onus of repaying the loan does not go away by declaring yourself bankrupt.
Part III (Sections 78 to 187) of the Bankruptcy Code deals with the insolvency resolution and bankruptcy for individuals and partnership firms. Debt includes both financial and operational debt.
What can a lender do?
A single creditor or several creditors jointly can trigger insolvency if there is evidence of default on payments. "But creditors cannot initiate the process unless there is actual default,'' says Kumar Saurabh Singh, Partner, Khaitan & Company. The creditor can appoint a Resolution Professional to trigger the process and file an application to initiate insolvency resolution process. If the insolvency resolution process fails - on account of non-disclosure of information by debtor, rejection of repayment plan by creditors or repayment plan not fully implemented, bankruptcy process can be initiated. The bankruptcy application can also be filed if it has been found that the insolvency resolution process was initiated to defraud the creditors.
What can debtors do?
An individual can also trigger an insolvency process when he/she is unable to pay his/her debts or commits a default, that is, non-payment of dues. The Code provides for both Fresh Start and Insolvency Resolution processes. In the former, if the individual's income and assets are lesser than specified limits, he is eligible for a discharge from their 'qualifying debts'. Qualifying debts include all unsecured debt except certain debts incurred due to fine or penalty imposed by the court or a debt incurred in the past three months before filing a Fresh Start Process application. The IRP examines and prepares a final list of all qualifying debts within 180 days or six months from the date of application. When this period expires, the Adjudicating Authority passes an order on discharging of the debtor from the qualifying debts and gives an opportunity to the debtor to start afresh, financially. Misha says that it is advisable to initiate the Fresh Start Process only when the debtor is unable to pay his debts even after liquidating all his assets.
But, while it will relieve the debtor, there is a certain stigma attached to it. "Since all the information will be made public and any foreign travel will require approval by the adjudicating authority. So, unless someone is in a real trouble, one should not trigger Fresh Start Process,'' says Singh. The Insolvency Resolution Process is more like a dialogue between the borrower and creditors.
INSOLVENCY RESOLUTION PROCESS
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When the gross annual income of the debtor is not more than Rs 60,000
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If the aggregate value of the debtor's assets is not more than Rs 20,000
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The aggregate value of the qualifying debt does not exceed Rs 35,000
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The debtor is not an undischarged bankrupt
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He does not own a dwelling unit
- No previous order under this code has been made in relation to debtor in the preceding 12 months of the date of application
Lenders can't claim all assets, but…
These include dwelling house, property held for any other person, funds kept aside for maintenance of spouse, children and elderly parents, provident fund, pension fund, gratuity fund, and life insurance policy in the name of the debtor or immediate family members. Lenders can claim other properties belonging to the debtor, other than dwelling house. But there's a catch. However, if a transaction has been done merely with intent to defeat the rights of the creditor, then the trustee has a right to examine and cancel such transactions. Many times, debtors expecting a bankruptcy situation, could transfer all assets to their family members. But the law will verify if the assets transferred exceed the bare minimum required for the maintenance of the debtor and family. "So, while it ensures that creditors' interests are not defeated, it also protects an individual's rights,'' says Singh.
There is a threshold. If the debtor is staying in a Rs 10 crore house and is not repaying a Rs 50 lakh loan, the adjudicating authority may order sale of the house for repayment, Singh adds.
Lenders also cannot also claim tools, vehicles and equipment necessary to the debtor's personal use or for the purpose of his employment, business or vocation.
