Empowering legal heirs of debtors to participate in insolvency resolution

Prachi Apte a research associate at IBBI and Sushanta Kumar Das, deputy general manager at IBBI advocate for a revised approach that empowers the legal heirs or representatives of the debtor to actively participate in the insolvency resolution process

They cited the Insolvency and Bankruptcy Board of India (IBBI) data to says that 16 cases of insolvency against personal guarantors that got dismissed or withdrawn either before or subsequent to the appointment of resolution professional due to the death of the personal guarantor.

They say that the absence of provisions allowing for continuation of insolvency proceedings against the legal heirs or representatives in the event of the death Liability of Legal Heirs of the debtor assumes significance as it leads to an abrupt and premature halt to the ongoing insolvency process, leaving crucial matters unresolved and with no recourse.

Enabling provisions

According to them, Sub-section (5) of section 123 of the Insolvency and Bankruptcy Code (IBC) provides for initiation of bankruptcy proceedings against the legal heirs/representatives of the deceased debtor. Section 169 and 170 of the Code also allow the continuation of bankruptcy proceedings of a deceased debtor. Therefore, the Code allows the initiation as well as continuation of bankruptcy proceedings of a deceased debtor, but creditors are not allowed to continue the insolvency resolution process of the deceased debtor.

This differential treatment in the insolvency resolution process and bankruptcy stages underscores a salient and consequential disparity. The absence of a provision analogous to section 123(5) during the insolvency resolution stage curtails the rights and responsibilities of the debtor’s legal representative, resulting in an unintended void in the insolvency process. This not only curbs the potential for a more holistic resolution but also imposes limitations on the rightful involvement of all relevant stakeholders, especially in cases where the debtor’s demise occurs during the course of the insolvency proceedings.

The absence of a provision enabling the seamless substitution of legal heirs during the insolvency resolution process has inevitably led to a consequential practice of filing of bankruptcy applications against the legal representatives of the debtor, even as a potential resolution opportunity is at hand. This practice, undoubtedly, casts an unfortunate stigma upon the bankrupt individual and further complicates an already challenging situation. In light of this, it becomes imperative to underscore the need for reform.

Need for a relook

The authors strongly advocate for a revised approach that empowers the legal representatives of the debtor to actively participate in the insolvency resolution process. The current absence of such a provision during the insolvency resolution stage hastens the process towards the initiation of bankruptcy.

This, in turn, denies an opportunity for legal representatives to rightfully inherit parental or ancestral property, exacerbating the complex aftermath of insolvency. This unintended consequence not only adds an unjust stigma to the legal representatives but also perpetuates the societal perception of bankruptcy as a stigma. In the Indian context, insolvency continues to carry negative connotations, and this further highlights the need for a more nuanced legal provision. The viewpoints of the BLRC, along with other prevailing domestic and international laws, accentuate the need to acknowledge and address this disparity by enabling legal representatives to participate in the insolvency proceedings.

Also See: Voluntary participation in committee of creditors for faster corporate resolution