INDIVIDUAL INSOLVENCY IN THE INSOLVENCY & BANKRUPTCY

CODE – AN OVERVIEW

"Bankruptcy is a legal proceeding in which you put your money in your pants pocket and give
your coat to your creditors” - Joey Adams

The Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as ‘IBC’) has been brought into
force with an idea to have an effective and adequate framework for insolvency and bankruptcy. The
objective was to consolidate and amend the laws relating to reorganization and insolvency resolution
of companies, partnership firms and individuals.
IBC is divided into VI Parts. While provisions of Part I and Part II were brought into effect from
01.12.2016, provisions of Part III were not notified with the commencement of the IBC. It is only
vide gazette notification dated 15.11.2019 bearing Serial No.4126 that the Central Government has
appointed 01.12.2019 as the date on which certain provisions of Part III of IBC, i.e., Insolvency
Resolution and Bankruptcy For Individuals and Partnership Firms will be notified. It is of relevance
to state that Part III of IBC is to apply to matters relating to fresh start, insolvency and bankruptcy of
individuals and partnership firms where the amount of default is not less than one thousand rupees.
By way of the gazette notification, the part relating to fresh start has not been notified. The only part
that has been notified relates to the Personal Guarantors to the Corporate Debtors and not the other
provisions of Part III.
Considering that certain provisions of Part III have been given a date on which the same will be
made effective, it is relevant to understand certain nuances of the provisions and have an overview
of the relevant sections.

Part III of IBC is applicable to 3 categories of individuals:

(i) Personal Guarantors to Corporate Debtors;

(ii) Individuals with Partnership Firms or Sole Proprietorships, and

(iii) other Individuals.

This classification has come in light of the fact that each of these individuals have distinct
peculiarities, characteristics and dynamics requiring different treatment because of economic
considerations. The Working Group on Individual Insolvency was of the view that a phased
implementation of individual insolvency and bankruptcy is the intention of legislature and a practical
necessity and suggested that the provisions of the Code may first be notified for personal guarantors
to corporate debtors. The remaining provisions of Part III of the Code applicable to the other
categories of individuals may be notified in subsequent phases along with separate rules and
regulations.

This Part adopts the same definitions as given under Section 3 for the terms ‘creditor’, ‘debt’,
‘default’. Under this part, ‘debtor’ includes a judgment debtor. One of the major distinctions between
the Corporate Insolvency Resolution Process (hereinafter referred to as ‘CIRP’) and Personal
Insolvency is that the Adjudicating Authority is the Debts Recovery Tribunal (hereinafter referred to
as the ‘DRT’), while in the case of a Corporate Debtor, the Adjudicating Authority is the National
Company Law Tribunal (hereinafter referred to as ‘NCLT’). It is only in a case where CIRP has been
initiated or is pending against the Corporate Debtor of which an Individual is a Personal Guarantor
that the jurisdiction vests with the NCLT being the Adjudicating Authority.

Another distinction that one gets to see in the Individual Insolvency and CIRP is that the
threshold of initiating the insolvency process against an Individual is Rs.1,000/-, which by
notification by the Central Government can be revised upto Rs.1,00,000/-. On the other hand, the
minimum amount of default for initiation of CIRP is Rs.1,00,000/-.
As stated hereinabove, in so far as Part III applies to matters relating to Fresh Start, the same is
yet to be notified. To put it succinctly, what the process of Fresh Start entails is as follows. Fresh
Start Process is applicable to debtors who meet the eligibility criteria as set out under Section 80 of
the Code. Though debtor who is unable to pay his debt may apply personally or through a Resolution
Professional (“RP”) for discharge of his qualifying debt, the specific eligibility criteria such as his/her
gross annual income of less than Rs.60,000/- aggregate value of the assets less than Rs. 20,000 and
aggregate value of the qualifying debts less than Rs.35,000/- and no home ownership, among others,
makes the provision unlikely to be of much practical use. Since the eligibility criteria are so meagre,
a person below such a threshold level may not even be able to follow the basic procedure under the
law. Therefore, it would be worthwhile to see the practical usage of the process of Fresh Start upon
its notification.

The actual provisions which have come to be notified can be read under Chapter III of Part
III of IBC. It is also imperative to reiterate that the provisions of Chapter III of Part III of IBC which
relate to the Personal Guarantors to the Corporate Debtor will be brought into effect from 01.12.2019.
The said route is the Insolvency Resolution Process through which all creditors and the debtor agree
on a negotiated ‘repayment plan’. Unlike the Fresh Start Process, the Insolvency Resolution Plan can
be initiated either by the Debtor or the Creditor, personally or through an RP by submitting an
application form as prescribed by regulations. As soon as an application is filed under Section 94 or
95 of IBC, an Interim Moratorium shall commence on the date of such application in relation to all
the debts and the said Interim Moratorium shall cease to have effect on the date of admission of such
application. The nomination or selection process of the RP is provided under Section 97. If the
application is filed through the RP, the Adjudicating Authority is to direct the Board within 7 days to
confirm if there is any disciplinary proceeding against the said RP. In case an application is filed by
the debtor or creditor, the Adjudicating Authority is to direct the Board to nominate the RP. The role
of the RP is to examine the application and to make a report recommending acceptance or rejection
to the Adjudicating Authority.

Once the Insolvency Resolution Process application has been accepted, a moratorium would
commence on all collection actions, which would remain effective either till the acceptance of the
repayment plan or six months (180 days from admission). The Adjudicating Authority shall thereafter
issue a public notice, and creditor claims will be collected by the RP. The RP will submit a report
with the repayment plan to the Adjudicating Authority. What is interesting to note that the
repayment plan is a proposal prepared by the debtor in consultation with the RP to the committee
of creditors for restructuring of his debts and affairs. The plan is required to be approved by the
majority of creditors, defined as more than three-fourth in value. If any modifications are made by
the committee of creditors, the consent of the debtor must be sought by the RP. Therefore, it can be
stated that unlike a CIRP, the Insolvency Resolution Process of an individual seeks maximum
involvement of the Individual and is aimed to maximize repayment of debt(s).

It may be pointed out that once the repayment plan is approved by the creditors and sanctioned
by the Adjudicating Authority, the plan would be binding on the debtor and all the creditors
mentioned in the plan. If the same is rejected, the debtor and the creditor shall be entitled to file an
application for a Bankruptcy Order under Chapter IV. The implementation of the plan is to be
supervised by the RP and a completion report is to be submitted to the Adjudicating Authority. It is
on the basis of the repayment plan that a discharge order may be granted to the debtor either early or
on completion of the repayment plan. Thus, from the tone and tenor of the language, intent and
purpose of Part III of IBC, it can be stated that the Insolvency Resolution Plan is not a debt recovery
process by one creditor alone, but is a collective process where all creditors of a debtor sit across
the table to negotiate a plan according to which all debts of the debtor are to be repaid.
It is only if the aforementioned option of repayment fails, that the Bankruptcy Process can be
initiated which involves realization and distribution of the estate of the debtor. On failure of the
Insolvency Resolution Process [due to the rejection of application for incomplete information or made
with intention to defraud creditors; non-approval of the repayment plan; or non-implementation of
the repayment plan within the agreed period], the creditor or the debtor may apply for the bankruptcy
proceedings within 3 months of the order of the Adjudicating Authority.
On admission of the application for bankruptcy, an insolvency professional will be nominated as the
bankruptcy trustee by the IBBI if either the debtor or creditor has failed to propose one. A bankruptcy
order will be passed by the Adjudicating Authority which will mean the commencement of
bankruptcy. The same will have the effect of declaring the debtor as ’bankrupt’ and vesting the estate
of the bankrupt with the bankruptcy trustee. After this order, subject to Section 128(2), any creditor
of the bankrupt shall not initiate any action against the property of the bankrupt in respect of debt
claimed; or commence any suit or other legal proceedings except with the leave of the Adjudicating
Authority.
On vesting of the estate, the bankruptcy trustee shall undertake due process for registering the claims
of the creditors, and administering and distributing the estate of bankrupt in the order of priority as
prescribed under Chapter V. Having given an overview of the provisions which will be given effect
to from 01.12.2019, it is also important to analyze the practical aspects that maybe involved in
implementation of the provisions. As the law stands settled that after culmination of the CIRP, even
in the event a Resolution Plan comes to be passed, the liability of a Personal Guarantor to such a
Corporate Debtor will not cease. In such an event, it will have to be ascertained as to how equitable
it would be to continue proceedings against the Corporate Debtor as well as its Personal Guarantors
and Corporate Guarantors simultaneously. What will also have to be taken note of is as to what stage
it would become prudent for lenders to either initiate simultaneous proceedings against various parties
or to put to rest such proceedings once certain recoveries are made. Apart from the aforementioned
facts, it is also to be seen that once Part III wholly made effective, the DRTs will assume the role of
Adjudicating Authorities. It may not be out of place to state that the Fora for determination and
adjudication of debt or recoveries thereof are increasing and may overlap with each other’s
jurisdiction.
For a single transaction, there can be multiple proceedings. In such situations, it is imperative that
there is harmonious reading of all proceedings that may be pending or may be initiated qua one
transaction for which there may be separate stake holders such as Corporate Debtor, Personal
Guarantors to such Corporate Debtors as well as Corporate Guarantor.