Resolve Personal Debt through the Insolvency and Bankruptcy Code 2016. Legal course for Individual Liabilities.

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6 months ago

Author: Shubham Gite, New Law College Pune.

The Insolvency and Bankruptcy Code 2016 (IBC) has significantly contributed to settling disputes within the finance sector and has provided relief to banks, as illustrated by cases such as Bhushan Steel, Videocon, and Ruchi Soya, which are examples of corporate insolvency. However, there is limited discussion surrounding Part III of the IBC, which addresses insolvency resolution and bankruptcy for individuals and partnership firms.

It is essential for everyone to be informed about the stipulations in Part III of the IBC 2016, especially as the “RBI has indicated a year-on-year growth of 14.2% in the personal loans sector as of January 24, 2025.”

Understanding the Individual Insolvency Resolution

In India, a large number of borrowers are Individuals including small business owners, farmers, and salaried employees who take credit for various purposes. Consumption, housing, and Business purposes with the rise in personal loans, credit card debts, and informal lending, individual insolvency has become a pressing issue. Financial distress, when left unaddressed, not only ruins personal creditworthiness but also leads to social and economic insecurity.

Part III of the IBC provides an organized process for Individuals facing financial distress to resolve their debts where one is in extreme financial stress.

Some important definitions;

Debt: under section 3(11) of IBC, debt refers to any liability or obligation arising in regard to a claim due or payable by any person and consists of both operational and financial debt.

2. Insolvency: insolvency is defined as a financial condition or state experienced when:

A Person’s liabilities (debts) exceed their assets, commonly referred to as balanced sheet insolvency.
When a person can no longer meet their debt obligations on time as they become due, commonly referred to as cash flow insolvency.

3. Bankruptcy: bankruptcy is defined as a successful legal procedure that resulted from:

An application to the relevant court by a legal entity or a person to have themselves declared bankrupt; or
An application made to the relevant court by a creditor of a legal entity or a person to have a legal entity or a person declared bankrupt; or
Any special resolution that is made by a legal entity and presented to the registrar of companies to be declared bankrupt.

Scope and Applicability of Part III of IBC

Individual.
Partnership Firms.
Individual Guarantors to Corporate Debtors.

The Adjudicating Authority under this part is the Debt Recovery Tribunal (DRT), except for personal guarantors to corporate debtors, whose matters are heard by the National Company Law Tribunal (NCLT).

Ways to Deal with Insolvency for Individuals

Fresh Start Process (section 80 to 93):

The fresh start process is enshrined under Chapter II of Part III of the code. The fresh start process gives to a debtor who cannot pay his debts a chance to clear his debts within a limited timeline period by meeting the stipulated terms of fresh start of his qualifying debts.

The fresh start process intends to provide debtors with comparatively small debts and restart afresh without any liability. The fresh start process is an alternative to the insolvency and bankruptcy process. In order to shield and mitigate against the misuse of this debtor centric process, the code has coincided some limitations in the availability and validity of the fresh start process.

WHO CAN MAKE AN APPLICATION FOR THE FRESH START PROCESS?

The Insolvency and Bankruptcy Code, 2016 has section 80 which states that in case a debtor who fails to pay his debt and satisfies the following conditions, will be allowed to initiate an application in respect of a fresh start process to receive a discharge on qualifying debt.

Qualifications:

The Gross annual income does not exceed sixty thousand rupees.
The total assets do not exceed twenty thousand rupees.
Its total debt is not more than thirty-five thousand rupees.
He is not an undischarged bankrupt.
He is not undergoing any other insolvency or fresh start process.
He does not own a dwelling unit, irrespective of whether it is encumbered or not.
Debts not included:
Obligation to pay the penalty of a Court of Law or Tribunal.
Civil liability to pay damages based on negligence, or nuisance, or one of many breaches of duties (such as statutory duties, contractual duties, or other general obligations).
An obligation to pay maintenance to anyone under any law in force at the time in force
Liability in relation to a student loan.
Any other debt as may be prescribed.

Procedure to Apply for Fresh Start Process

Sub-Section 4 of Section 81 of the IBC 2016, provides that an application for a fresh start process shall be in such a form and manner and accompanied by a fee as may be prescribed and shall contain the following information along with an affidavit namely;

A list of all debts that the debtor owed as on a date of said application and with details that are relevant to the amount of each debt, interest charged on the debt, and the names of the creditors to which the debt is owed.
The interest which is payable on the debts and the rate with which they provide in the contract.
A list of security taken of any of the debts.
The financial details of the debtor and that of his immediate family until two years prior to the application date.
The details of the personal information of the debtor as can be prescribed.
The reasons for making the application.
The particulars of any legal proceedings which, to the debtor’s knowledge

has been commenced against him.

The finding that no earlier fresh start order shall have been issued, pursuant to this Chapter and obtained with reference to the qualifying debts of the debtor in the preceding twelve months after the application date.

In the case of an application that is to be done under section 80, what will take place is that an interim moratorium will take effect on the date of filing an application and it will end on the date of admission or rejection of the application, as the case may be. The interim moratorium would stay any judicial process taken on all the legal actions involving the debt of the debtor and all such actions would be brought to a halt and no creditor will be able to take any action towards such a debt.

Appointment of Resolution Professional: Under section 82 of IBC 2016, the application can be filed by the Debtor himself or else he can file an application through a Resolution Professional. When the debtor applies by himself the Adjudicating Authority that is Debt Recovery Tribunal shall appoint a Resolution Professional to ascertain the application and report on the liability of the debtor. Upon submission of the report, the resolution professional suggests to the adjudicating authority whether the report shall be accepted or rejected.

Under section 84 the Adjudicating Authority will be obligated to either accept or reject applications within a period of 14 days starting at the date of submissions. Once the application is accepted, a list of qualified debts is provided to the creditors.

This period of moratorium begins upon Acceptance of the application. In this moratorium period, there shall be no legal action or proceedings can be initiated, and if any legal procedure is initiated then those proceedings are stayed until the final call by the Adjudicating authority.

During the Moratorium period debtor:

Shall not be a director of the firm personally or through a competent person.
Shall not dispose of or alienate his assets.
Shall inform his business partner, that he is under process of a fresh start process.
Not to be abroad other than with permission of Adjudicating authority.

Subsequently, the creditor is allowed to file an objection within ten days once he is served with the order by the adjudicating authority. Objections may be taken by creditors on the following grounds.

The details provided by the debtor are incorrect.
Wrong inclusion of debt as qualifying debts.

The resolution professional shall consider the objection and after reviewing it shall provide or submit the application to the adjudicating authority.

Resolution Professional can revoke the order if:

The financial status of the debtor is altered.
The debtor is not eligible under Fresh start process.
Non-compliance of the debtor to the restriction imposed.
The debtor acted in a malafide manner and willfully failed to comply provision of this chapter.

Discharge Order:

Prior to the expiry of the moratorium, the Resolution Professional must furnish final list to the Adjudicating authority, following which the order will be issued at the expiry of the moratorium period by adjudicating authority that the debtor is relieved the qualifying debts.

When the debtor is discharged from the debts, he shall not have to pay the qualifying debt and all the liabilities come to the end of the debtors.

Example: Apoorva, a housemaid in Delhi, earned Rs. 4,000 per month with no major assets. She owed Rs. 40,000 rs in small bank loan. Being unable to pay, she applied under the Fresh Start Process. The resolution professional verified her eligibility and the DRT admitted her application. After following due procedure, the DRT issued a discharge order freeing her from the debt.

FAQ

Q. On what grounds can an aggrieved debtor or creditor make an application to the Adjudicating Authority against the action taken by the Resolution Professional under the Fresh Start Process?

Ans. Section 87 of the Code empowers an aggrieved debtor or creditor to make an application to the Adjudicating Authority challenging the action taken by the Resolution Professional under the Fresh Process within 10 days of such decision, on any of the following grounds namely that :-

the resolution professional has not given an opportunity to the debtor or the creditor to make a representation;
or the resolution professional colluded with the other party in arriving at the decision; or
the resolution professional has not complied with the requirements laid down in Section 86 of the Code.

Case laws:

Swiss Ribbons Pvt. Ltd. v. Union of India (2019) 4 SCC 17:

Supreme Court Judgment that upheld the constitutional validity of IBC.
Relevance: It recognized that IBC provides mechanisms for both corporate and individual insolvency, showing the intent to cover all types of debtors under a unified code.

2.Insolvency Resolution Process (section 94-120):

The Insolvency resolution process (94-120) under part III of IBC,2016 is a mechanism for an individual whose loan is more than the fresh start process limit and one who is willing and able to repay the loan over time.

In this mechanism debtor who commits default can apply for the Insolvency resolution process (ISP) either by himself or through a resolution professional to the Adjudicating Authority that is Debt Recovery Tribunal by submitting an application with fees.

Besides, section (95) of IBC 2016, gives the same mechanism to the creditor to file an Insolvency resolution process against the debtor if he defaults.

Here, when a person is a partner in a partnership firm, he cannot initiate an insolvency resolution process against a partnership firm where he is a partner though he can file an application for ISP for an individual with the consent of all the partners of the partnership firm.

This mechanism is not for excluded debts such as;

Obligation to pay the penalty charged by a Court or Tribunal.
Liability to be ordered to pay damages in negligence, nuisance, or breach of a statutory or contractual or other legal duty.
Liability to pay maintenance to any person under any law for the time being in force.
Liability in relation to a student loan.
Any other debt as may be prescribed.

The following conditions must be fulfilled to be eligible for ISP;

1. A debtor will not have a right to make an application in case he is—

(a) an undischarged bankrupt;

(b) undergoing a fresh start process;

(d) undergoing a bankruptcy process.

2. had during the course of the twelve months prior to the date on which such application under this section is made, been admitted against the debtor.

Procedure:

Filing of an application by the debtor by himself or through a resolution professional to the Adjudicating authorities (Debt Recovery Tribunal).
Once the application is submitted to the Adjudicating Authority, immediate starting of an interim moratorium. In an interim moratorium, all the pending legal action and proceedings are stayed and no new legal proceeding or action can be initiated by the creditor.
If the application is submitted through the resolution professional then the adjudicating authority directs the Insolvency Bankruptcy Board of India (IBBI) to verify whether there is any disciplinary action against the resolution professional if not the same resolution professional can continue with the procedure.
Also, if the application is filed by the debtor himself then Adjudicating authority directs IBBI to nominate a resolution professional for ISP.
The resolution professional has to examine the application submitted by a debtor and submit a report to the Adjudicating Authority recommending approval or rejection of the application. Further Resolution professionals may seek further information and explanation in relation to debts. The resolution professional has to give a reason for acceptance or rejection of the application. It also gives a copy of the report to the creditor.
Once the application is accepted by the DEBT RECOVERY TRIBUNAL, a moratorium commences for all debts. During the moratorium period, no legal action and proceeding can be initiated against the debtor, if any legal proceeding has already been initiated against the debtor it comes to stay till the completion of the moratorium period.
Under this moratorium debtor will have no right to transfer, alienate, encumber, or dispose of any of his property or his legal or equitable within his property.
Adjudicating authority issues a public notice to invite claims from all creditors. Creditors register claims with the resolution professional by sending details of claims.
The repayment plan is prepared by the resolution professional in consultation with the debtor, for restructure of debts. It shall consist of the justification and reason for such a plan. It also consists of a provision for payment of fees to resolution professional.
After creditors meeting and discussions for resolution, the repayment plan is submitted by the resolution professional to the Adjudicating authority. In the meeting, the approval plan shall be passed by 3/4th of the total creditors presents in person or by proxy.
The adjudicating authority shall Accept or Reject the repayment plan approved by the creditors based on the final report submitted by the resolution professional. If approved by the Adjudicating authority order and direction for repayment plan is issued. But if rejected debtor or creditor becomes entitled to file an application for bankruptcy under Chapter IV of IBC,2016.
On execution of the plan, the Resolution Professional shall supervise the implementation of the repayment plan. On completion of the repayment plan, the resolution professional issues a notice of full implementation of the repayment plan, if the repayment plan is not fully implemented by the debtor, the creditor becomes entitled to apply for bankruptcy process under this code.
The Adjudicating Authority issues a discharge order after the repayment of the plan is completed. Lastly, the debtor will not be subjected to any of the debts.

Case Example: Manish, borrowed Rs. 16 lakhs from various lenders for his business. Due to COVID-19, he suffered losses and defaulted. He applied for IRP and presented a plan to repay Rs. 12 lakhs over 3 years by selling non-essential assets and reducing personal expenses. The creditors accepted the plan. Upon successful completion, Manish was discharged from the remaining Rs. 4 lakh liability.

FAQ:

Q. What is a repayment plan and what details shall it include?

Ans. According to Section 105 of the Code, a repayment plan means a plan prepared by the debtor in consultation with resolution professional containing a proposal to the committee of creditors for restructuring of his debt or affairs.

The repayment plan shall include the following: –

Justification for preparation of such repayment plan and reasons on the basis of which the creditors may agree upon the plan.
Provision for payment of fee to the resolution professional.
Any such other matters as may be specified.

Q. How is the debtor discharged?

Ans. According to Section 119 of the Code, on the basis of the repayment plan, the resolution professional shall apply to the Adjudicating Authority for a discharge order in relation to the discharge order. The discharge order shall not discharge any other person from any liability in respect of his debt.

Case laws: