FRESH START PROCESS AND INDIVIDUAL DEBTORS’ PREDICAMENT

Author: Anil Kumar Ranjan [4th year B.A.LL.B (Hons.), IMS UNISON UNIVERSITY, Dehradun]

ABSTRACT

This special law was enacted for individuals owing a relatively lesser amount of loan and having little or no assets to repay the same. Individuals or partnerships can use this method to discharge their debts and start afresh with no liabilities. However, the provisions for the fresh start process have not yet been notified under this code, and as a result, millions of operational debtors willing to liquidate their struggling businesses have been left out of the insolvency and bankruptcy process. The exclusion of individual from the whole process has denied them with the opportunity to revive their business and has left no other option than to close their business. Fresh start process is boon for such small debtors, but it imposes a threat over the corporate credit culture. The insolvency and bankruptcy code has historically served to protect the interests of corporate entities, but adding individual debtors to the system, correcting this anomaly, and establishing clear rules are urgently needed.

INTRODUCTION

The Insolvency and Bankruptcy Code, 2016, provides a consolidated framework addressing insolvency and bankruptcy proceedings for companies, limited liability partnerships (LLPs), individuals, and partnership firms and time-bound resolution for defaulting debts. The IBC has helped improve the "credit culture" in the country and made corporate rescue more dynamic. The concept of the "fresh start" process was inculcated in the Insolvency and Bankruptcy Code by a panel set up by the Insolvency and Bankruptcy Board of India, headed by Justice Srikrishna. This special law was enacted especially for individuals owing a relatively lesser amount of loan and having little or no assets to repay the same. Individuals or partnerships can use this method to discharge their debts and start afresh with no liabilities. The provisions for the fresh start process have not yet been notified under this code, and thus, no statutory provisions providing the form and manner for its initiation have been notified by the Insolvency and Bankruptcy Board of India.

FRESH START PRCOESS- MEANING AND PURPOSE

The "Fresh Start Process", as the name suggests, means to start something afresh, as this whole concept has been made for the debtor to discharge their debts and restart afresh with no liability. This procedure acts as an alternative to the insolvency and bankruptcy processes. Individual entities or the partnership are one of the most crucial parts of nation’s economy. Many of the entities, through partnerships, advance loans from lenders to operate and grow their companies. It is very tough to ascertain the exact amount of credit provided by the banking sector compared to the limited liability firms. It can be accepted that most of the agriculture loans are received by individual entities compared to MSME industries. Also, some of the loans related to services, trade, and NBFCs are also passed on to individuals. As per a report, personal loan growth has accelerated to 20.4% y-o-y in February 2023 from 12.5% in the year-ago period. However, since the provisions of the fresh start process are still to be notified, individual debtors have not been recognised as a part of the insolvency and bankruptcy processes. Millions of operational debtors willing to liquidate their struggling businesses and move on have been left out of the insolvency and bankruptcy processes.

In accordance with Section 80 of IBC 2016, a debtor unable to pay their debts and who fulfils the criteria specified in the Act may apply for a Fresh Start Process. Anyone having an aggregate annual income not exceeding Rs. 60000 and whose aggregate assets are not more than Rs. 20000 can apply for FSP. Once an application is made to DRT, fulfilling all the provided criteria, and their application is approved, they are released from the obligation of paying the qualifying debts.

INDIVIDUAL DEBTORS – THEIR ISSUES

Whenever any loan is settled through the Fresh Start Process, the credit report will show the creditor’s settlement or write-off of the debt, which may impact future access to credit. While availing relief under FSP, the debtor shall be well informed that it may negatively impact its credit report and score, which in turn may limit their future access to credit. With so many positive facets to the Fresh Start Process, there is also another side that talks about the possible threats that can arise from it, such as how it might affect India’s corporate sector credit culture. Many borrowers would purposefully display their unwillingness to repay the loan despite having the means to do so, forcing IBC to settle their dispute on their behalf.

The pandemic impacted various small debtors drastically, which led to the shutting down of various businesses that deserved a smooth exit but were unable to find any relief through the Insolvency and Bankruptcy Code. These debtors, through the Fresh Start Process, can approach the Debt Recovery Tribunal (DRT) for debt resolution as per Section 179(1) of the Insolvency and Bankruptcy Code 2016. However, the provision has not been made functional until now. DRT’s recovery rates have been under 4% compared to over 25% for SARFAESI and IBC, which can be listed at the bottom of the table. At the same time, it suffers from many more fallacies, such as failing to differentiate between actual business failure and fraudulent conduct. DRT lacks the necessary ability to decide on a potentially significant number of such cases because they are already overburdened with corporate matters under the SARFAESI Act, etc. The fresh start process frees the debtor’s future income from the shackles of previous debts. India has acted too harshly against the debtors by enacting penalising provisions such as Section 29A of the Insolvency and Bankruptcy Code 2016. Companies struggling through financial difficulties should be given an opportunity for revival and some honest individual should be given a "fresh start". A discharge in bankruptcy is essential to a "fresh start," as it exempts a debtor’s revival from another individual’s claims. Under IBC 2016, Section 29 A states that the management of debtors is prohibited from bidding for the enterprise under a resolution plan, which also restricts them from having an opportunity for its revival.

CONCLUSION

A bench of LN Rao and BV Nagarathnawhile deciding a case opined that "one of the principal objectives of the IBC is providing for revival of the corporate debtor and to make it a going concern. Initially every attempt must be made to revive the concern and make it a going concern, with liquidation being the last resort". The corporate debtors have been provided with such a facility that assists them in the revival of their businesses, whereas the individual debtors lack such an opportunity for their businesses, and the insolvency processes of the individual debtors are still to be notified by the IBC.

Though the individual creditor has been recognised under the insolvency and bankruptcy code as an operational creditor, the individual debtors have yet to become a part of it. Presently, the Provincial Insolvency Act of 1920 and the Presidency Towns Insolvency Act of 1909 apply to non-corporate insolvency. The creditors dodge these century-old statutes from the colonial era that set down these regulations. The two laws shall be repealed upon notice in accordance with Section 243 of the code, and the code shall take their place. These age-old laws suffer from lots of loopholes as well as unprecedented delays, which lead to the piling up of a greater number of cases for many more irregularities. The government was considering a plan to make such a waiver possible through out-of-court settlements but given the small quantity of loans and the poor's limited ability to go through a demanding insolvency process supervised by the DRT, this was not a realistic option. The DRTs also lack the capacity to decide on a sizable number of such matters because they are already overburdened with corporate issues under the SARFAESI Act, etc. As a result, the government shall consider the possibility of enabling such a scheme through an administrative procedure. The Insolvency and Bankruptcy Code has been a historical step towards protecting the interests of corporate entities, but the inclusion of individual debtors in the system, the rectification of this anomaly, and the framing of clear rules are very much required, especially in an economy where small-scale job creators dominate the enterprise landscape.