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.