[By Kartik Adlakha]

The author is a fourth year student of Jindal Global Law School and can be reached at kartikadlakha.7@gmail.com.

Introduction

The Insolvency and Bankruptcy Code, 2016 (“IBC” or “the Code”) is divided into three distinct parts. While Part I titled ‘Preliminary’ and Part II titled ‘Insolvency Resolution and Liquidation for Corporate Persons’ have been in effect for long. However, Part III titled ‘Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms’ is yet to be brought into effect.

Individuals and corporates are the two types of guarantors that usually guarantee a loan given to the corporate debtor. While corporate guarantors are already covered under Part II of IBC, personal guarantors find no place under IBC.

Ministry for Corporate Affairs (“MCA”) is considering notifying and bringing Part III into effect in this regard. MCA and Insolvency and Bankruptcy Board of India (“IBBI”) invited public comments on the Draft Regulations for Bankruptcy Process for Personal Guarantors to Corporate Debtors. Draft Regulations for Bankruptcy Process for Personal Guarantors were published in a discussion paper by IBBI. Personal Guarantors being individuals would feature under Part III of the IBC.

This blog post seeks to  present a comparative analysis between the current liquidation process for insolvent personal guarantors under Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (“RDDBFI Act”) and the process proposed under IBC. It also seeks to illustrate the pros and cons of the IBC process and will conclude with suggestions on how to make the process for individual insolvency better under IBC.

Comparison between the Existing Legal Regime for Individual Guarantors and the Proposed Regime under IBC

As of today, recovery from an individual guarantor is covered under the RDDBFI Act. The process under RDDBFI happens before the Debt Recovery Tribunals (“DRTs”). The Adjudicating authority under IBC as laid down by Section 179 would also be DRT but the proceedings would happen as per the new process envisaged under IBC.

The process under the RDDBFI Act starts with an application to the DRT by a bank or financial institution under Section 19 of the Act which is to be accepted or rejected by the DRT within 30 days. If accepted, a summons is issued to the personal guarantor under Section 19(4) of the Act. The personal guarantor needs to submit a statement of defence as provided under Section 19(5) of the Act within 30 days of service of summons. Then, the Hearing for Admission or Denial of Documents takes place as specified under Section 19(5A) of the Act. The whole process concludes with the passing of the final order under Section 19(20) of the Act which has to be passed within 30 days from the conclusion of the hearing. A certificate of recovery is issued by the Presiding Officer with the Final Order as per Section 19(22) of the Act. The Presiding Officer then sends it to the Recovery Officer for Execution.

The proposed process under IBC starts with a bankruptcy application to DRT by any individual creditor or debtor under Section 121 of the Code. Then on the direction of DRT, an Insolvency Professional will be appointed as the Bankruptcy Trustee by IBBI under Section 125 of the Code within 10 days. After this, DRT will pass a bankruptcy order under Section 126 of the Code within 14 days of receiving the confirmation of the appointment of the bankruptcy trustee under Section 125 of the Code. This order will vest all rights relating to the assets of the personal guarantor in the bankruptcy trustee until the bankruptcy process completes. This would follow a public notice by DRT inviting claims from creditors under Section 130 within 10 days from the bankruptcy commencement date (“BCD”). BCD is the date on which Bankruptcy Order has been passed. This would follow registration of claims under Section 131 of the Code and preparation of a list of creditors under Section 132 of the Code by the Bankruptcy Trustee. Post this, a meeting of creditors will be called by the Bankruptcy Trustee within 21 days from the BCD. As per Section 136, Administration and Distribution of Estate of Bankrupt will follow. After completion of administration and distribution, a final report has to be submitted by the bankruptcy trustee to the committee of creditors. The committee of creditors will have to approve the report and judge whether the bankruptcy trustee be released under Section 148 of the Code or not. The process will come to an end with the Bankruptcy Trustee applying for a discharge order under Section 138 of the Code which would release bankrupt from all bankruptcy debt.

Need and Importance of Draft Regulations

These regulations provide for a level playing field for recovery from both corporate and individual guarantors by bringing personal guarantors under IBC. They also promote transparency and accountability as they provide for regular reports by the Bankruptcy Trustee [i] in addition to the final report requirement under IBC. Voting process and guidelines for sale of bankrupt’s assets is also delineated under these proposed regulations.

However the most important element of individual insolvency put forth by the regulations is the concept of minimum protection. The regulations elucidate that up to 5 lakh rupees of personal ornaments and a single dwelling unit would come under excluded assets and will not be subject to the bankruptcy proceedings. Working Group on Individual Insolvency, a group constituted by IBBI to recommend the strategy and approach for implementation of the provisions of the Code has proposed an all-encompassing formula for calculation of the single dwelling unit. This formula takes into account the size of the debtor’s family, the minimum area required for each family member and the circle rate of the area.

This is important as it indicates that the Working Group is sensitive to the fact that individuals and not corporations are at stake here, and they do need minimum assets for their survival. However, it is felt that the upper limit of personal ornament protection is quite less and should at least be increased to 10 lakh rupees. This is because it is assumed that individuals acting as guarantors to large corporations because of the stature and asset base would have personal ornaments of value much more than 5 lakhs.

Why Switching to the Newly Proposed IBC Regime Makes Sense

1. Individuals can initiate proceedings:

Under the RDDBFI Act, only Banks or Financial Institutions can initiate proceedings, but under IBC, any individual creditor or debtor can also initiate proceedings. This advantage would make the filing of cases easier, fill the legislative gap and also help in recovery of more loans.

2. Creditor focus and more recovery:

Switching to IBC from RDDBFI helps because it would bring in more creditor focus. The process under the RDDBFI regime is a court driven process, but under IBC, it is largely a creditor driven process, as power is mainly in the hands of the Committee of Creditors. It has also been proven that the debt recovery under IBC is three times better than all the other routes (DRT, SARFAESI and Lok Adalats) combined.

3. Process proving debt under IBC is simpler and less time consuming:

As under the RDDBFI regime, the debt has to be proven in front of the tribunal but under IBC, proving of debt has already been covered in the resolution process as bankruptcy proceedings can only be initiated after the resolution process has been completed. Even otherwise, proving the debt is much simpler under IBC as only documents acting as evidence of debt owed to the debt are required to be submitted, while under RDDBFI, there is requirement of a hearing that takes place along with submission of Statement of Defence.

Problems Left Unaddressed under the IBC Regime

1. Absence of a general time limit and lack of remedial measures:

The new IBC regime seems to be better in terms of creditor focus but provisions for quick recovery have not been included. RDDBFI Act clearly mentions that the proceedings should be completed within two hearings and the application should be disposed within 180 days, but there is no general time limit such as such under the IBC. This is surprising as although there is a general time limit of 270 days which was recently amended to 330 days for corporate persons, but there is no such deadline for individuals and partnership firms under Part III of the Code.

2. The gaps in DRT ignored and not provided for:

Moreover, DRTs are ridden with problems of inefficiency due to lack of proper support staff, vacant benches, inadequate infrastructure. IBC should make provisions to tackle these already existing problems of DRTs as they are eventually bound to crop up in the new regime also. There is also change in attitude required to be brought in by IBC by imposing strict guidelines for grant of adjournments, as DRTs are known to grant frequent adjournments which makes process of debt recovery cumbersome and long.

Conclusion

It is accepted that benefits of switching to IBC Regime outweigh the problems anticipated but to fully utilise the benefits of the IBC regime, it is proposed that the government solves problems of infrastructure and personnel requirements and also makes rules to prevent repeated adjournments. It is also recommended that a general time limit for the bankruptcy process of personal guarantors be introduced under IBC to further the aim of a quick recovery. Moreover, as the scope of operation of DRT has been increased and it would have to entertain applications from individual creditors and debtors also, therefore new DRTs should be established to absorb the growing workload. Provisions of minimum protection should also be looked at to increase protection for personal ornaments.

References

[i]https://www.ibbi.gov.in/webadmin/pdf/whatsnew/2019/Apr/Discussion%20paper_2019-04-26%2016:38:00.pdf.