Personal Insolvency Process: A Staggering Need Of The Hour - Part II

The authors are Aditya Singh and Yash Bhatnagar, third year students at Dr. Ram Manohar Lohiya National Law University, Lucknow.

Introduction

In the previous part of this blog, the authors analysed the viability of current legal regimes dealing with the personal insolvency and bankruptcy process and tried invalidating the like nature of corporate and personal insolvency resolution processes that currently exists in the country. In this part, the authors will explore the personal insolvency goal elucidated in the BLRC report, identify the need of the hour from these directives, and give an international outlook to the problem dealing with personal and consumer-based insolvency regimes.

Beneficiaries of IBC

In the example of Jaypee Infratech, a company with a market cap of around 300 crores and debt accrued of ₹ 8,343.21 crores filed for bankruptcy after defaulting on its loan. The Company’s executives will benefit from a long-drawn process of debt resolution which is likely to frustrate the lender, but will give companies enough opportunities to influence a more amicable resolution for themselves. This shows that the code’s intent of helping out a corporate debtor is to a certain extent, successful. However, the same would not apply to a personal or individual debtor. If the individual with debts worth 20 times their assets would file for bankruptcy, they would be termed a dishonest debtor and would be denied a fresh start process.

If an employee of the very same company, who had, a couple of months before winding off of the company, taken a substantial amount of loan on the assumption of repaying that loan from their salary, they would fail to do so. The employee would fail to even have those loans classified as qualifying debts at the time of applying for insolvency, as there is a minimum requirement of three months for a debt to be termed as ‘qualifying debt’. This requirement, however, when intended to classify or separate an honest debtor from a gambler, fails to consider any emergencies that a family might face.

This encapsulates the fact that any time a regulation is made or an extra obstacle is added to avail a certain right or relief, it only becomes costlier for the rich and next to impossible for the poor.

Inspiration for the BLRC report

The BLRC report has been primarily based on the BLRC (Bankruptcy Law Reform Committee) guidelines. Unfortunately, with regards to personal Insolvency laws, many recommendations of the report have not been implemented, and its vision of the individual debt resolution process has not been realised.

As mentioned in the previous part of this blog, one of the first steps toward formulating a modern, comprehensive insolvency law was repealing colonial-era laws, namely the Provincial and Presidential Towns Insolvency Act of 1920 and 1909 respectively, which has been elucidated under section 243 of the IBC but has not been notified as of today.

Two major goals of the BLRC report for the process for individuals are providing a fair and orderly process for dealing with the financial affairs of insolvent individuals, and providing effective relief or release from the financial liabilities and obligations of the insolvent. The IBC embarrassingly fails in clarifying an orderly manner as there is still a lack of clarity as to which law would apply to an individual insolvency procedure. The debtor is stuck between pre-independence laws and a modern law that does not exist as the only source of relief. Bhargavi Zaveri, Senior Research Associate at the Indira Gandhi Institute of Development Research has said, “At the moment we do not come to know how one resolution plan has been chosen over the other, or how creditors decided to go for liquidation instead of other alternatives.” She further added, “We do not know who has proposed resolution alternatives, what is the recovery rate or how is it computed. We have to rely on media articles or glean through the fine print of orders of the tribunals and dig whatever information we can from them. Those too are not standardised and often do not reveal the relevant information.” The makeshift approach of the legislation can clearly be seen in the clubbing of a corporate insolvency resolution procedure with that of an individual insolvent. Filing for bankruptcy is the last measure that any debtor takes and a comprehensive bankruptcy law inspires confidence in the people to start life from a new beginning.

On top of this, the second goal i.e to provide effective relief or release from the financial liabilities and obligations might seem innocuous prima facie but at what cost is the code going to provide the said effective relief? If the goal is to provide relief and/or release from liabilities, is liquidating all the assets of an insolvent really a viable measure? Even if the measures are codified to provide for release from current liabilities, tools utilised to achieve the same would inevitably plunge the debtor back into accruing more liabilities in order to actually achieve a ‘fresh start’. The failure of the code to differentiate between a corporate and an individual debtor as mentioned in the previous part of this blog further adds fuel to the existing conundrum in insolvency proceedings.

The report also mentions providing the correct ex-ante incentives for a fairer resolution process as another one of its goals but fails to mention what these incentives would be and also does not provide guidelines as to what must be taken into consideration (debtor’s requirements, creditor’s rights) when formulating these ex-ante incentives.

Lack of Data

It is lamentable that such a comprehensive report made for corporate debtors by analysing insolvency data of such corporate debts contains in the same code a haphazardly written individual insolvency procedure that is not based on any substantial data. This entire problem has turned into a never-ending cycle- a lack of data leads to an uninspiring law which leads to debt in the informal sector going unchecked and unreported which again leads to a lack of data for governmental policies. In a democratic society, public policy choices can be made intelligently only when the people making the decisions can rely on accurate and objective statistical information to inform them of the choices they face and the results of the choices they make. The assessments and design of insolvency regimes should be based on relevant statistics, thereby providing the infrastructure for sound policy decisions.

International Outlook

The international approach to insolvency is very different from that of India. For instance, the United States offers a debtor a chance at a fresh start by filing bankruptcy mainly under Chapter 7 and Chapter 13 of the US Bankruptcy Code. It is not argued that the American solution is perfect but at least by law, there is an opportunity herein for the debtor to discharge their debt and begin with a clean slate. This is a formal discharge of the entire debt and has an entirely separate process from that of an insolvent corporate debtor. Further, in Chapter 7 there is a regulation for the debtor to preserve secured assets such as their home and car for them to be able to accommodate themselves and search for a job to achieve the fresh start goal. The example of the EU however, is something that we should not aspire to emulate, since debtors herein spend an average of 5 years discharging their debts, living on subsistence wages while the remainder of their income is divided between their creditors. While evidence shows that a discharge period of 3 years or more is not socially sustainable, a discharge period of this length is only possible in eight member states and is only guaranteed in two.

An International Monetary Foundation (IMF) report further calibrates the importance of data collection and assessment in the field of insolvency. This is a call for the authorities to create a mechanism wherein differentiated data is collected especially from that of informal sectors and MSMEs to ensure that the process of insolvency is inclusive and accessible for everyone.

Conclusion

Over the course of this two-part blog, problems with the existing regimes in the personal insolvency and bankruptcy sphere have been discussed and the fallacies in the current code and its inadvertent effects have also been highlighted. There is also an analysis of the lack of structural cohesion for personal insolvency processes in the country and how they are deemed synonymous with CIRP (Corporate Insolvency Resolution Procedure), backed with the opinion of the BLRC report on which this code was formulated and an international outlook to the same.

While looking from an international perspective, India needs to look inwards as much as it does outwards. The problems of this country are unique to it and the varied demography presents various challenges for which a comprehensive broad-scoped personal insolvency and bankruptcy law is the need of the hour.