Fresh Start Process And The Plight Of Individual Debtors

Nishant Kumar is a first-year student at Hidayatullah National Law University.

Introduction

The fresh start process was envisaged by a panel set up by the Insolvency and Bankruptcy Board of India (IBBI) under the leadership of Justice Srikrishna. Under the Insolvency and Bankruptcy Code, insolvency procedure of only the personal guarantors of the corporate debtors is recognised. All the other individual debtors who are not the guarantors of a corporate debtor have to apply for the insolvency under the archaic British era legislations, Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920. Fresh Start Process brings in a special law for the small and poor debtors to resolve their debts and rehabilitate their position in the corporate market. In this article, the author attempts to analyse the Fresh Start Process and bring to light the concerns of individual debtors.

Fresh Start Process

The term fresh start means to start something from the beginning, the concept of this insolvency procedure is similar to its literal meaning as it allows the debtors to discharge their debts completely and start their businesses again. This procedure is different from the other processes of insolvency resolution. For instance, CIRP and Pre-Packs facilitate the resolution of the corporate debtors whereas fresh start absolves the debtors of their loans completely. However, there are certain drawbacks to the fresh start process for the individual debtors. Under the Credit Information Companies (Regulation) Act, 2005, loans or debts taken by an individual or corporate debtor and their payment history is regulated by this Cct. Credit score is one of the most important aspects on which the loan to the debtor depends. When a loan is settled through the Fresh Start process or any other process for that matter, the credit score of a debtor is affected severally that in turn adversely affects the chances of the borrower getting credit in the future. So, before the fresh start process, a debtor must be apprised of his current position and his position after the settlement of the debt.

The fresh start process is listed under Chapter 2 of part 3 of the Insolvency and Bankruptcy Code. Section 80(2) of the code gives the criteria of the debtors who can apply for the settlement of their debts under the fresh start process. It says that anyone can apply for the fresh start whose aggregate annual income does not exceed 60,000 rupees and whose aggregate asset does not exceed 20,000 rupees. Furthermore, it also puts a restriction on the total debt which should not exceed more than 35,000 for a person to be qualified for the fresh start process. The Adjudicating Authority in case of a fresh start process is Debt Recovery Tribunal (DRT) unlike the corporate debtors whose insolvency process is headed by the NCLT.

With multiple benefits and appreciations of the fresh start process in India, there are also some criticisms of it. The procedure is mainly challenged because many in the corporate sector think that this process may jeopardise the credit culture in the corporate sector of India. They argue that many debtors would deliberately show the reluctance to pay the loan despite having the resources and they would be handheld to the settlement of their debts by IBC. However, the argument of depreciation of credit score of the borrower and their precarious position in getting the credit in the future may hinder these obnoxious activities. Also, many small businessmen are not aware of these facilities and consequently, they are unable to receive the benefits of the fresh start process. Thus, awareness of insolvency procedures in the far-reaching corners of the country should be given due consideration.

Individual Debtors and their Concerns

Individual businessmen are one of the most important elements of the nation’s economy. A huge chunk of these businessmen tend to take advance credit from the lenders to operate and expand their businesses. Like the corporate firms these individual debtors also sometimes fail to pay their debts owing to the unpredictable nature of their business. According to a report by the Reserve Bank of India titled ‘Sectoral Deployment of Bank Credit’, the personal loans segment grew 12.4% in March 2022 as against 10.7% in March 2021. However, the insolvency process of these individual debtors has not been notified by the IBC yet. Individual creditors have been given recognition under the Insolvency and Bankruptcy Code as operational creditors but individual debtors are not part of the system till now. It is quite surprising that millions of bona fide debtors who need to resolve their debts and resuscitate their struggling businesses have been blanked out of the process. These debtors who are the most basic part of the economy deserve a smooth exit just like the big corporate firms. During the COVID pandemic, a number of businesses collapsed and many of them became insolvent but they could not find any relief through the IBC. The government has recently operationalized the Fresh Start process through which small debtors can move to DRT for debt resolution, however, it still does not cover a huge chunk of individual debtors. According to the IBC individual debtors can apply for debt resolution under section 179 of the code but the provision has not been made functional till now. However, even if individual debtors are notified under IBC their cases would be handled by DRT, which has proved to be the least efficient institution in terms of resolving insolvency with only 4% of recovery rate comparatively very less than the SARFAESI and IBC with 25% recovery rate.

Conclusion

Presently, individual insolvency in India is dealt by Presidency Towns Insolvency Act 1909 for the presidency cities of Kolkata, Mumbai and Chennai, and Provincial Insolvency Act governs the rest of the provinces of India. These are the archaic British era legislations which are still in force for the individual debtors. In this fast paced corporate world it is pertinent to keep updating the laws to keep things in tandem. However, these century old laws have not seen any major change, consequently affecting the efficiency of the insolvency process. There are numerous problems with these laws and unprecedented delays in the insolvency cases opens the floodgates for many more irregularities. The modern-day Insolvency and Bankruptcy law has been widely acclaimed for its resolution and liquidation process of the corporate debtors. It gives the time and opportunity to the debtors to resolve and liquidate their companies according to the situation. It is beneficial for both debtors and the creditors as it tries to maximise the left-over asset of the debtor so that the creditor can get its credit back. However, in the old enactments there is no concept of resolution of the distressed debtor. The debtor does not get a chance to restructure the company and save it from liquidation. The legislation lacks any negotiation process in which both the creditor and debtor could negotiate their transactions. The ineffective legislation also has a very low credit recovery record thus adversely affecting the credit market of India.

The ineffectiveness of the law is further capitalized by the absence of any Adjudicating Authority to deal with the insolvency cases rather the power is vested in the judiciary which itself is laden with lakhs of cases. Consequently, it exposes the person willing to restructure his debt to a vexatious litigation process. Another important missing piece in this jigsaw puzzle is the absence of any provision for an interim moratorium at the commencement of the insolvency proceedings. The absence of moratorium period exposes the debtor to possible legal actions and proceedings against their debts, further complicating the process. These complexities and irregularities in the archaic law forces the debtor to the door of insolvency even though many of them might be in the position to offer some arrangement and repay their due debts to the creditors.

It is indeed a matter of great surprise that such obsolete laws are still governing the fast-paced economy of our country. The Insolvency and Bankruptcy code has done a great job in incorporating the traditional and non-traditional (out of court settlements) procedures to resolve the debts of corporate debtors. However, the inclusion of individual debtors in the system is the need of the hour. The present government which has been widely promoting the start-up culture and entrepreneurship in our country should all the more be concerned about the plight of these businessmen who get stuck in the labyrinth of these anachronistic laws.