This is how India’s personal bankruptcy framework may look like

As Indian insolvency and bankruptcy authorities are getting ready to roll-out personal insolvency regulations, it only natural for the curiosity about the look and feel of the laws is running wild.

While the nitty-gritties of the individual bankruptcy will only be revealed once the draft rules are unveiled, we can still figure out the contours of the law through a working group paper on bankruptcy laws for personal guarantors floated in March 2019.

While the focus of the paper was bankruptcy law for personal guarantors, it also talks at length about the other kinds of individual bankruptcies and their solutions.

Simpler and easier processes

The working group largely talks about a simpler process for initiating insolvency, easier resolution and easier discharge for the debtor from the state of bankruptcy.

The working group has proposed doing away with the need to prove past defaults of a debtor and instead allowed the creditor to initiate bankruptcy process by proving the specific default it is concerned with.

Once the bankruptcy proceeding against an individual is started, all other pending suits and actions against him should be stayed so that he/she can concentrate on the bankruptcy proceedings.

It provides for a linear process. First stage of the process is Insolvency Resolution Process (IRP) – where the creditors and debtors can negotiate on a repayment plan. If the IRP fails, the bankruptcy process begins where the creditor then goes ahead and liquidates the assets of the debtor to recover its dues.

The working group was especially mindful of the fact that personal bankruptcy could be a big social stigma for an individual and it could lead to various disqualifications such as not hold a public office, not being able to get elected or vote as a member of any local authority, etc., and this could negatively impact the life of an individual. Hence it favours an easier process of discharge from the state of bankruptcy.

A discharge may be obtained once the assets of the debtor are completely distributed to all the creditors. However, if this has not been done within a year of commencement of bankruptcy, the debtor shall automatically be discharged on expiry of such year.

In terms of payment, priority has been accorded to creditors. Government dues are the last in the priority list.

Separate categories

The paper identifies three separate categories of individuals – personal guarantors to corporate debtors, individuals with business (partnership firms and proprietorship firms) and individuals without business.

The working group noted that these three categories of individuals have distinct peculiarities, characteristics and dynamics, and though involvement of individuals is a common factor in these categories, they may require slightly distinct treatment and processes in insolvency.

It says that insolvency proceedings of a corporate debtor and its personal guarantor should be closely linked to each other. It also noted that individuals with business are likely to behave in a way consistent with the classical economic ideals on which business insolvency systems are founded.  On the other hand, behavior of individuals without business interest is expected to be somewhat informal.

In many countries, the personal bankruptcy proceedings for individuals without businesses, also known as consumer debtors, are simpler. Like in the UK, they have an individual voluntary arrangement protocol to provide a straightforward reorganization procedure for consumer debtors. In the US, there is a separate law for consumer debtors, which provides full insolvency procedures for them, with a specific emphasis on counselling and rehabilitation.

The working group had mooted a simpler framework for individuals without business with lesser involvement of Adjudicating Authority, lesser process costs, and more rehabilitative assistance for such debtors. It had also contemplated an out-of-court mechanism for individuals without business.

The adjudicating authority for insolvency cases of individuals with business and without business would be the Debt Recovery Tribunal (DRT), but that for personal guarantors to corporate debtors would be the National Company Law Tribunal (NCLT).

Excluded assets

The working group has floated a concept of ‘excluded assets’ – those assets of individuals which will be protected from the bankruptcy process. It feels that these are assets which are necessary for the survival of the debtor during and after insolvency or bankruptcy proceedings.

“An important goal of personal insolvency is rehabilitating honest debtors in society and avoiding repeat bankruptcies. In order for a debtor to start afresh after the bankruptcy process, she should have access to assets to live a life with dignity and continue her livelihood,” it observes.

Excluded assets may include personal ornaments and house or flat. However, such assets should not be part of any mortgage.