The Insolvency and Bankruptcy Code (IBC) 2016 can be a game-changer to resolve problems of insolvency for individuals and Partnership firms. In particular, its ‘Fresh Start Process’ – although not yet notified – is envisaged as a solution for debtors to discharge their (small) debts and start afresh without any liabilities.
Why the IBC is a superior recovery tool over other measures
- Separation of powers between commercial and judicial aspects of bankruptcy proceedings
Unlike the Civil Court/DRT/Sarfaesi which all envisage a judicial-centric proceeding leaving a very small role for other stakeholders, the IBC separates the commercial aspects of insolvency and bankruptcy from its judicial aspects. Thus, under IBC 2016, stakeholders and the Adjudicating Authority are empowered to decide matters within their respective domain expeditiously.
- Provides a legal framework for quick solutions to business failures
Previous recovery laws concentrate on debt-recovery instead of business re-organisation or restructure. The IBC envisages a realistic approach towards revival of business units. Under these measures, the management of the firm and its assets will be vested in an insolvency professional (IP) who will run the firm as a going concern. Furthermore, a Committee of Creditors (CoC) can be constituted to evaluate options for the firm. If a resolution plan with the required majority is not approved, the firm mandatorily undergoes liquidation.
- Envisages resolution of the firm as a ‘going concern’
A firm’s closure destroys organisational capital, renders resources idle until reallocation and reduces the possibility of resolution. The IBC therefore facilitates continued operation of the firm as a going concern to preserve the value of its property, help recover its lost value (say through fraudulent transactions) and assist the CoC to arrive at the best resolution plan.
- Instils a sense of teamwork and credit discipline
The IBC does not envisage an adversarial (e.g. plaintiff versus defendant) system of proceeding. It encourages team effort and responsibility to find a resolution and complete the process in time. Moreover, it instils a sense of urgency among defaulting borrowers because of the possibility of losing their assets if the resolution fails. Thus it leads to better credit discipline and slower accretion of new non-performing assets (NPAs or bad loans) in the Indian banking system.
Salient Features: Fresh Start Process for insolvency of individuals
- To ensure that secured creditors remain protected, the process will not apply to secured debts
- A number of criteria regarding the debt and assets of debtor need to be fulfilled:
- The debtor can have a maximum gross annual income of only INR 60,000
- The maximum value of assets should not exceed INR 20,000
- The value of the debt (qualifying for the fresh start) must not exceed INR 35,000
If all these conditions are met, an application may be submitted either by the debtor or by a Resolution Professional (RP) on his behalf.
The IBC provides for an evaluation of the application by a Resolution Professional.
This is followed by a decision on its acceptance or rejection by the Debt Recovery Tribunal (DRT) within 14 days of receiving the Resolution Professional’s recommendations on the application.
If the application is accepted by the DRT, the applicant/debtor gets legal protection from both current and future legal proceedings for 180 days from the date of application submission. At the same time, the IBC also gives creditors the right to object to any of the facts/grounds listed in an accepted Fresh Start application.
After the RP has reviewed all the qualifying debts and made a final list, the DRT may pass an order to discharge the debtor from all of his/her obligation w.r.t these debts.
Role of Resolution Professional: The RP will act as the main channel of communication between the parties involved (the creditors/debtors) and the DRT. It is the RP’s duty to ensure that the DRT is informed of any change in financial circumstances, a previous malafide representation or omission by the debtor (if any) as well as any other situation which could make the DRT change its decision to accept or reject the initial Fresh Start application.
The provisions of IBC 2016 are not yet officially notified. Unfortunately, the limits provided above are too small in present-day conditions to provide relief to small businesspersons and therefore need to be reviewed before notification. Only when the values of income and assets are enhanced can individuals having financial troubles avail of the provisions of IBC 2016.
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