Bankruptcy Code on Non-Corporate Insolvency and Bankruptcy

[The following
guest post is contributed by Vinod Kothari & Niddhi Parmar of Vinod Kothari
& Co]
The Bankruptcy Laws Reforms
Committee (“BLRC”) presented its final
(“Final Report”) to the Government of India on November 4, 2015. This
Final Report is divided into 2 parts, i.e. Volume I and Volume II comprising the
text of the findings and recommendations and the draft Insolvency and
Bankruptcy Code, respectively. The Committee has made recommendations regarding
a holistic overhaul of the bankruptcy resolution regime in India, irrespective
of type of entities. Hence, the suggested bankruptcy framework (“Bankruptcy Code”
or “Code”) covers insolvency of companies, limited liability partnerships (“LLPs”),
other entities with limited liability (these entities collectively called
“Corporate Debtors”) and other entities, including a household.
Presently, the corporate insolvency
procedure is contained in three major legislations, viz. the Companies Act,
2013, Sick Industrial Companies (Special Provisions) Act, 1985 (“SICA”), and Securitisation
and Reconstruction of Financial Assets and Enforcement of Security Interest Act  Act, 2002 (“SARFAESI Act”). There is no
dedicated insolvency law in case of companies – courts apply “insolvency
principles” in case of insolvent companies. The insolvency principles have
emerged over the years in India and in UK. The law of insolvency of individuals
is contained in two separate laws covering individuals, sole proprietorships
and partnership firms, viz. Presidency Towns Insolvency Act, 1909 and Provincial
Insolvency Act, 1920. The former legislation covers the erstwhile presidency
towns, namely, Calcutta (now Kolkata), Bombay (now Mumbai) and Madras (now
Chennai). The rest of the country is covered by the latter legislation, although
the contents of the two laws are by and large similar.
The recommendations of the BLRC regarding
corporate bankruptcy have been covered in an earlier
post on this Blog
. The present post covers the recommendations relating to
non-corporate bankruptcy.
Elaborate recommendations were made
by 26th
Law Commission Report
on the consolidation of the two insolvency laws into
a single law. The said report discusses the evolution of insolvency laws and
the principles in India, goes into the need for consolidation, recommendations
for the new law in line with UK Bankruptcy Act, etc. For decades, the
recommendations of the Law Commission remained on the backburner. In recent
times, the N L Mitra Committee made recommendations about comprehensive rewrite
of bankruptcy laws. The BLRC’s recommendations about devising a complete new
code and providing the draft of the Code is a laudable first attempt of its
kind in the available history of Indian legislation.
Scope of the Bill
Part III of the Bill covers
insolvency of both business and non-business entities, including individuals, unincorporated
bodies or and firms  (collectively referred
to as “non corporate debtors”).
The Bill proposes the following
scenarios for such non-corporate debtor:
– Fresh start:
this is a new and laudable concept indeed, allowing a person to give a fresh
start to life. However, the applicability of the option is greatly limited by
the very narrow monetary limits laid – annual income of Rs 60000, and assets of
Rs 20000. This largely covers the bottom-of-the-pyramid individuals who may not
have qualified for any borrowing in any case.
– Insolvency
resolution process: This is a regular insolvency resolution process that may be
initiated either based on application by the debtor, or by the creditor.
– Bankruptcy
process: While liquidation is the ultimate remedy in case of corporate debtors,
bankruptcy, that is, declaration of the non-corporate debtor being bankrupt, is
the ultimate scenario in case of non-corporate debtors.
Institutional framework
In case of non-corporate debtors,
the Debt Recovery Tribunals (“DRTs”) will be the Adjudicating Authority (“AA”).
This will require substantial sprucing up of the DRTs, which are currently inadequately
staffed. In addition, the insolvency professionals in corporate insolvency will
also be involved in non-corporate cases.
Fresh start process
Fresh start is an opportunity
granted to the individual, to seek moratorium, phasing out of obligations,
etc., so that the individual may start life afresh. Fresh start application may
be made by the debtor, provided the income and asset criteria are within the
thresholds referred to above, and the “qualifying debt” for which the
individual seeks relief is limited to Rs 35000. Secured debt is not included
within the definition of “qualifying debt”. Also, student loans are excluded
from the purview, as they are defined as “excluded debt”.
We have commented above about the
paltry limits of income, assets and the debt fixed under the law. Not only
should these limits be enhanced to make the provision practical, the law should
not fix the limits – the limits should be left for the Government to notify. It
seems highly impractical that an individual seeking relief in respect of debt up
to Rs 35000/- will afford the fees and expenses of the resolution process,
including those of the insolvency professional, and that the institutional
framework should act as Samaritan for such small value cases. The idea of the Committee
may be that the fresh start option will lead to financial inclusion, but
whether the population segment covered by the provisions will at all be able to
reach out to the institutional framework under the Bill will remain doubtful.
A fresh start application may be
made in a case of inability to pay the qualifying debt, for which prima facie
recommendations will be made by an insolvency professional. The AA may admit
the application based on the recommendations. If a fresh start application is
admitted, there will be a 6-month moratorium against any legal action for
recovery of the qualifying debt. Of course, during this period, there is an
injunction on entering into several to-be-notified transactions by debtor. The
debtor may travel overseas only with the approval of the AA.
A fresh start process is akin to a
one-time waiver of debt, based on the adjudication of the AA.
Insolvency resolution process
While the fresh start process is a
debt waiver plan, the insolvency resolution process in Chapter III of Part III
is very similar to corporate insolvencies – this involves the appointment of a
resolution professional, listing out of all eligible creditors, preparation of
a restructuring and repayment plan, and order by the AA in respect of the resolution
plan. Unlike the fresh start process, (a) there are no monetary limits in case
of the insolvency process; and (b) the application for the resolution may be
filed either by the debtor, or by a creditor.
The key element in the resolution
process is the preparation of a repayment plan, which is also sanctioned, like
in case of corporate debtors, in a creditors’ meeting. Once the AA approves the
repayment plan, the resolution professional will also supervise the
implementation of the repayment plan. Once the resolution plan has been
implemented fully, the AA may pass an order for discharge of the debtor.
The processes in case of repayment
plan may be summed up as follows:
– Debtor in
consultation with the resolution professional shall prepare a repayment plan
containing a proposal to the creditors for restructuring of the debtor’s debts
or affairs;
– Resolution
professional shall submit the repayment plan to the AA within a period of 21
days from the last day of filling the claims;
– Repayment plan
shall be submitted to the AA along with a report of the resolution professional
on the repayment plan;
– The meeting of
the creditors shall be called on the place, date and time as specified in the
report of the resolution professional — notice shall be served to the
creditors at least 14 days prior;
– The meeting of
creditors shall not be extended by the resolution professional beyond the
period of 5 days at a time;
– Resolution
professional shall prepare a report of the meeting of creditors — copy of the
report shall be forwarded to the debtor, creditors and AA;
– AA shall pass an
order on the basis of report submitted by the resolution professional —
acceptance or rejection of the repayment plan — copy of order shall be
forwarded to the Board and insolvency professional agency;
– Resolution
professional shall supervise the implementation of the repayment plan;
– Resolution
professional shall within 14 days of the completion of the repayment plan, send
the documents listed out under clause 117 to the persons who are bound by the
repayment plan and the Adjudicating Authority — may apply to AA for extension
for a period not exceeding 7 days;
– Resolution
professional shall apply to the AA for a discharge order in relation to the
debts mentioned in the repayment plan and the Adjudicating Authority may pass
an order accordingly;
– Moratorium shall
cease to have effect at the end of 6 months from the date of admission;
– Discharge order
shall be forwarded to the Board and the insolvency professional agency.
Bankruptcy process
If the non-corporate debtor is not
allowed the resolution process, or fresh start process, the AA may order the
bankruptcy. Bankruptcy is the ultimate inability to pay – in case of corporate
debtors, this may involve the dissolution of the entity. In case of
non-corporate debtors, this will involve all assets of the debtor being taken
over by the “bankruptcy trustee” (akin to the liquidator in case of corporate
Once bankruptcy order is made, it
has the effect of vesting the estate of the bankrupt in the bankruptcy trustee,
who shall distribute the same to the creditors in the order of priorities laid
in the law. Bankruptcy process is like a collective pursuit by the creditors of
realisation of their debt. Secured creditors may enforce their security
interest in accordance with the applicable law [clause 128 (2)], however, there
is a maximum time of 6 months from the date of the bankruptcy order.
The procedure in case of bankruptcy
involves the following steps:
– File an
application for bankruptcy;
– The applicant
may propose a resolution professional as the bankruptcy trustee in the
– Moratorium shall
commence from the date of making an application (clause 124(1)(a));
– If the
resolution professional is nominated as the bankruptcy trustee — AA shall
within 2 days of the date of application make a request to the Board for
seeking confirmation — Board shall communicate in writing about the
appointment or rejection and nomination of the resolution professional;
– If bankruptcy
trustee is not proposed by the applicant — AA shall within 2 days of the date
of application make a request to the Board to nominate a resolution
– AA shall pass an
order within a period of 2 days of receiving nomination of the bankruptcy
– Moratorium shall
cease to have effect on the bankruptcy commencement date (clause 124(1)(a));
– The copy of the
order and a copy of the application shall be provided to the bankrupt,
creditors  and bankruptcy trustee within
2 days of the passing of the bankruptcy order;
– The order passed
by the AA shall continue to have effect till the debtor is discharged;
– If the order is
passed on the application form bankruptcy by a creditor then the bankrupt
within a period of 5 days from the bankruptcy commencement date shall submit a
statement of affairs;
– AA shall issue a
public notice inviting claims from all creditors within 2 days from the date of
passing an order;
– Creditors shall
register claims with the bankruptcy trustee within 7 days of the publication of
the public notice;
– bankruptcy
trustee shall within 14 days from the bankruptcy commencement date, prepare a
list of creditors of the bankrupt;
– As per the list
prepared, the bankruptcy trustee shall within 16 days from the bankruptcy
commencement date;
– Bankruptcy
trustee shall summon a meeting of the committee of creditors – a report of the
administration of the estate of the bankrupt in the meeting shall be provided
— the report submitted by the bankruptcy trustee shall be approved by the
committee of creditors within 7 days of receipt of the report;
– The AA shall
pass a discharging order on the application made by the bankruptcy trustee —
expiry of 1 year from the bankruptcy commencement date or the date of approving
the report by the committee of creditors, whichever is earlier — copy of
discharging order shall be forwarded to the Board and the insolvency
professional agency.
The provisions pertaining to undue
preferences, fraudulent transfers, onerous contracts, extortionate credits etc
in case of non corporate debtors are similar to those in case of corporate
debtors. Section 178 lists out the priority of claims of different types of
creditors – this is also similar to the provisions in case of corporate insolvency.
– Vinod Kothari & Niddhi Parmar

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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