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A STUDY ON THE SCOPE OF INSOLVENCY PROCEEDINGS OF THE INDIVIDUAL AND PARTNERSHIP FIRM WITHIN IBC,2016
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A STUDY ON
THE SCOPE OF INSOLVENCY PROCEEDINGS OF THE INDIVIDUAL AND PARTNERSHIP FIRM WITHIN
IBC,2016
AUTHORED
BY- ANJALI KUMARI
BBA
LLB(Hons), Law College Dehradun, Uttaranchal university, Dehradun
CO—AUTHOR- PROF.
DR. ANIL DIXIT, Associate Professor,
Law College
Dehradun Faculty of Uttarancal University, Dehradun
ABSTRACT
The
enforcement of the Insolvency and Bankruptcy Code, 2016 was done to fulfill
majorly two important aims as, firstly by providing a timely response to the insolvency
proceedings and secondly drafting a singular comprehensive structure for
insolvency and bankruptcy of different entities within the bracket of single
legislation to avoid confusion. This same has been primarily highlighted in the
Banking Law Reform Committee, 2014.On the recommendation of the committee The
Insolvency and Bankruptcy Code, (Act 31of 2016) was successfully enacted on May
28, 2016. This article will deal here
with individual insolvency resolution, why it was a good idea to include it to
the Code, what is the structure for insolvency proceedings of the individual
and partnership firm, current trends and practices.
Keywords –
IBC, Personal Insolvency, Partnership firm insolvency, Fresh start.
INTRODUCTION
As a result
of the code’s enforcement, a system for dealing with business bankruptcy has
been operational for some time. The credit market was strengthened as a result
of the legislation’s enactment, which guaranteed creditors’ repayment of their
loans. The legislation’s primary goal is to help ailing businesses recover.
Providing a structured mechanism for the insolvency of the company is just one
of the primary goals addressed in the code. But the code’s noteworthy feature
is that it covers possibilities outside of company insolvency resolution that
necessitate different treatment than the corporate sector, rather than just the
extent to which companies are involved. Section III of the Code, which
addresses Individual Insolvency, points out towards different provisions for
different entities although it was never put into effect even though it was
originally in the code. Official notice of the provisions pertaining to the
insolvency and bankruptcy of personal guarantors, particularly people and
partnership firms, was given on November 15, 2019, and they went into effect on
December 1, 2019. As a result of the code's enforcement, a system for dealing
with business bankruptcy has been operational for some time. The credit market
was strengthened as a result of the legislation's enactment, which guaranteed
creditors' repayment of their loans. The legislation's primary goal is to help
ailing businesses recover. Providing a structured mechanism for the insolvency
of the company is just one of the primary goals addressed in the code. But the
code's noteworthy feature is that it covers possibilities outside of company
insolvency resolution that necessitate different treatment than the corporate
sector, rather than just the extent to which companies are involved. Section
III of the Code, which addresses Individual Insolvency, points out towards
different provisions for different entities although it was never put into
effect even though it was originally in the code. Official notice of the
provisions pertaining to the insolvency and bankruptcy of personal guarantors,
particularly people and partnership firms, was given on November 15, 2019, and
they went into effect on December 1, 2019. This article will deal Here with
individual insolvency resolution, why it was a good idea to include it to the Code,
what is the structure for insolvency proceedings of the individual and
partnership firm, current trends and practices.
The Banking
Law Reform Committee in its report had made clear the intention to
formulate individual insolvency as a separate branch. This can be seen from the
goal set up by the committee. These goals were-
·
The committee stressed on the formulation of personal
insolvency laws to deal with the financial affairs of an individual. They
suggested negotiation as a part of the formulation to safeguard both creditors
as well the debtor from the rigours of lengthy court procedures.
·
The guarantee for discharging the insolvent debtor.
The committee focused on the discharge of the individual on his fair
participation in proceedings. It will also serve as a method to build trust and
entrepreneurship culture.
·
The procedure of the insolvency must be fairly
balanced neither of the contending parties should gain unfair advantages out of
it.
These were
the guiding principles behind the formulation of the individual and partnership
firm insolvency proceedings.[1]
WHY PERSONAL INSOLVENCY LAWS ARE REQUIRED.
Individual
proprietorships and partnership businesses are important for the economy of
India as they are responsible for a significant share of India’s gross domestic
product (GDP) and labor, either directly or indirectly. In the context of the
Make in India initiative, government programs such as Start-Up India have
acknowledged the significance of these businesses to the Indian economy and are
seeking to provide them with significant support. For the Individual Insolvency
Resolution mechanism that is codified in the Code to be effective, this purpose
must serve as its foundation. Through the implementation of a settlement
process and the allocation of the debtor’s minimum assets for subsistence, it
is expected that the debtor’s interests will be protected and that creditors
will be prevented from causing him harm. By shielding individuals from the
repercussions of honest business failure, it ought to create an environment
that is conducive to entrepreneurial endeavors.[i] [i] Furthermore, it should
increase the availability of loans by ensuring that creditors receive higher
returns on their investments. In addition, in contrast to the current system,
the framework that is being proposed would include a strategy for addressing
disputes that include personal guarantors within the framework. In light of the
fact that a settlement procedure is currently in place for corporate
guarantors, this would be of great assistance in bridging the gap for Personal.
DEVELOPMENT
IN PERSONAL INSOLVENCY
LAWS IN
INDIA
The
primitive society always considered debt as a moral obligation, they were
equated to theft and treason and were liable for harsh punishment like slavery,
imprisonment even whrn the non repayment was without the fault of the
individual. However with the advent of time insolvency of the individual entity
were brought within the scope of civil laws,when there were no malice
intention. Prior laws were confined till the collection of the loan amount.
Legislation
concerning personal insolvency was enacted during the time that the British Raj
that had been in force till the enactment of this code. The Provincial
Insolvency Act of 1920, which applies to the designated provinces of British
India, and the Presidency Towns Insolvency Act of 1909, specifically applied to
Madras, Bombay, and Calcutta, were the two pieces of legislation that
constituted t legal framework in India for individual insolvency policies even
after independence. However, these statutes have been an exceptionally uncommon
choice for dealing with personal bankruptcies during the course of the
investigation. Both the Securitization and Reconstruction of Financial Assets
and Enforcement of Security Act, 2002 (hereafter referred to as the “SARFAESI
Act”) and the Negotiable Instruments Act, 1881 have been applied in order to
initiate the official recovery procedure. Ever since it was first put into
effect in 1881, Section 138 of the Negotiable Instruments Act has been an
extremely important component of credit recovery. This act provides for the
criminalization of the act of dishonoring a cheque, which was considered harsh
on the borrower for defaulting on their loan. Lenders especially in the home
mortgage industry in India had been depended on this clause more and more since
it was first introduced because they did not have any other viable alternatives
accessible to them at the time.[ii] Non-banking financial corporations continue
to concentrate their efforts on pursuing loans for individuals through this
particular market. As a result of the SARFAESI Act of 2002, financial
institutions and banks now have the ability to seize collateral without the
intervention of the legal system. It functioned as a method for recovering
debt that were not being repaid as
agreed upon.Even in present due tothe increased use of Section 138, the courts
are currently experiencing an excessive amount of work, which results in the
handling of property and mortgage processes in an inefficient manner and with
delays. Iii When it comes to the SARFAESI Act, the only entities that are
permitted to employ it are banks and other financial institutions. Over the
course of its existence, its efficiency has gradually diminished. By 2013, the amount
of cases that were recovered by the SARFAESI Act has decreased to 22%, whereas
in 2008, 61% of cases were recovered. IV As a result of this, both of these
choices were no longer relevant.
INSOLVENCY
PROCEEDINGS FOR INDIVIDUAL UNDER THE CODE, 2016
The
provisions of the Code that pertain to the resolution of insolvency and
bankruptcy proceedings are addressed in Part III. These regulations will apply
to both individuals and partnership firms. As a means of simplifying the
process, this part provides three distinct categories of individuals who who
fall within the ambit of the code.
1)
Personal guarantor of a corporate debtor;
2)
Partnership firm;
3)
An individual or sole proprietorship.
Individual
and business insolvency and liquidation are addressed in detail in Part III of
the Insolvency Code, 2016. However unlike the insolvency proceedings of
corporation where the Adjudicating Authority is National Company Law Tribunal
(herein referred as NCLT) and the appellate authority being National Company Law
Appellate Tribunal (herein referred as NCLAT), the Adjudicating Authority for
the proceedings of individual insolvency would be dealt by the Debt Recovery
Tribunal (DRT) whereas the Debt Recovery Appellate Tribunal (DRAT) will
handle appeals.
Part III of
the Code stipulates three procedures for resolution of personal insolvency on
default of a threshold amount of 1000 rupee minimum
The debtor
can apply through an application if the individual have the monthly income of
less than Rs. 5,000 and a debt amount not exceeding Rs. 35,000.
The debtor
can by himself or through the Resolution professional can file the application
for the insolvency proceedings to the Adjudicating Authority if following
conditions are met by the debtor
1)
The debtor has a gross annual income that does not
exceds sixty thousand rupees.
2)
The debtor’s assets total does not beyond exceed
twenty thousand rupees,
3)
The aggregate amount of the debts that are eligible
does not exceed thirty-five thousand rupees.
4)
The debtor is not a bankrupt individual, rather who
has been discharged from the earlier bankruptcy proceedings.
5)
Regardless of whether or not the residential property
in question is subject to any liabilities, the debtor does not possess any
residential property.
6)
There are no continuing processes against the debtor
that involve a fresh start, insolvency resolution, or bankruptcy.
7)
The debtor has not been subject to any fresh start
order under this particular Chapter within the preceding twelve months,
beginning from the date on which the fresh start application was submitted.
The code
also provides for te waiver of the debt
of the debtor in case debtors who are eligible for a full debt waiver, do not
have a housing unit, have an annual income of less than Rs.60,000, assets of
less than Rs.20,000, and debts of less than Rs.35,000 are all included in the
Code.
The code
specifies two step procedure for the insolvency proceedings of the individual
and partnership firm:
·
Fresh Start
·
Liquidation
Before the
application for the fresh start which can be made by the debtor and the
creditor can in the pre-initiation round negotiate with the terms.
STEP 1-
Fresh Start
If a debtor
can't make their payments as agreed, they can apply for a fresh start to have
their qualifying debts forgiven. People who owe money or their debt resolution
agent can start the process of applying for insolvency resolution. The IBBI has
to make sure that the person submitting the application is not currently facing
any disciplinary action when it comes from settlement experts working on behalf
of creditors or debtors. There are seven days from the date the Board got the
application to do the verification work. The IBBI will also choose a resolution
professional within ten days of getting an application from either the creditor
or the debtor if that application is sent in without a resolution professional.
In this case, the Board will make sure that the settlement expert that was
suggested is not facing any kind of punishment. The settlement specialist will
look over the application in less than ten days after the meeting is set up.
The resolution expert will write a report after the settlement process is over.
It is the main purpose of the report to explain the reasons behind the choice
of whether to accept or reject the applicant. A copy of this report should be
given to both the creditor and the debtor in question before it is sent to the
body in charge of settling disputes. The report will be used by the person
making the decision to decide whether to accept the application or not. In just
seven days after the decision is made by the adjudicating body, the creditors
must be given a copy of the settlement professional's report, the application
for bankruptcy, and the order itself. The DRT will announce the moratorium time
as soon as they have passed the order that starts the restructuring process.
During the moratorium, no legal actions or processes that are already going on
can be held up. Furthermore, the creditor lacks the power to take any further
legal action against the bankrupt. When two or more people work together, they
have to agree on the moratorium time. A final list of eligible creditors must
be made by the resolution professional and given to the adjudicating body at
least seven days before the end of the moratorium period. This is something
that needs to be done. When the moratorium time is over, the person in charge
of the case has to issue a discharge order. This frees the debtor from the
debts that meet the criteria for discharge.
Step 2 –
Liquiation
As long as
the implied moratorium time doesn't happen during the insolvency proceedings,
everything will stay the same for a new start for an individual or partnership
firm. The settlement specialist will then send a public notice to the creditors
telling them they have seven days to file a claim after the order is made. For
this message to be published, it must be in a newspaper that has editions in
both English and one other language. The notice must be posted on the building
of the deciding body and on the website of the governing body that is in charge
of deciding. Creditors must use electronic mail, courier services, speed post,
or registered mail to make claims official. Once the debtor gets demands for
repayment from creditors, they will work closely with a settlement professional
to come up with a way to pay back the debt. It is important that the draft
include a plan that has been given to creditors to reorganise bills. After
finishing the draft of the payback plan, the settlement professional has twenty
days from the last day for claims to be sent in to send the report to the
adjudicating body. Before the repayment plan can be put into action, it needs
to be approved by the debtors. The goal of calling a meeting of the Committee
of the Creditors is to reach this goal. At least 75% of the creditors must
agree to the payback plan in order for it to be legitimate. Someone is in
charge of settling the disagreement and must make a report based on the meeting
minutes of the creditors. This report must then be given to the group that is
in charge of making decisions. The body in charge of making decisions will use
the information in this report to decide whether to accept the repayment plan
or not. In the event that the agreed upon repayment plan comes into action,
both the creditors and the debtors will be legally required to follow its
terms. It is very important that the settlement professionals keep an eye on
how the repayment plan is carried out and make sure that tasks are done on
time. Following the completion of the repayment plan and full payment of the
debts, the settlement specialist will ask the governing body to cancel the
debts. You can file for a bankruptcy order either after the insolvency
settlement process is over or while it is still being finished.[2]
CONSTITUTIONALITY
OF THE PROVISION
In the case
of Dilip B Jiwrajka v. Union of India & Ors, Writ Petition (Civil) No. 1281
of 2021 alongwith connected matters[3]
(2023 INSC 1018), several petition under Article.32 of the COI were filed as
with regards that the provision contained in section 95-100 of the IBC,2016
which specifically deals with insolvency proceedings of the individual and
partnership firm along with the personal guarantor as enforced through second
amendment.
Contention
of the Applicant
·
That the contents of the section are in violation with
the principle of natural justice and are unfair and arbitrary in nature. They
provide unlimited power to the Resolution Professional to enquire with the
debtor, where the RP also indulges with the personal life of the debtor thereby
violating the right of privacy of the debtor.
·
Another contention that was raised by the petitioners
were that there is no rational nexus behind establishing different procedures
for corporation and individuals.
·
The petitioner also raised the point that the
implementation of interim moratorium hampers the interest of the debtors.
Observation
by the Court
This case
led before three judge bench, who collectively observed that the provision of
the code is constitutionally valid and rejected the contents of the
petitioners. They first observed that the role of resolution professional with
regards to corporate insolvency resolution proceedings (CIRP) is a lot more
different than what is stated in the Part III of the code with regard to the
Insolvency of individual and partnership firm. In CIRP RP takes over the
business of corporate debtor whereas in the other case the Role of RP is
limited to assisting the tribunals.
The court
then observed that moratorium under section 96 of the code is implemented just
to protect the debtor from claims in different tribunals.
With
regards to the infringement of the debtor right of natural justice. The Hon'ble
court observed that the provision states that in case of any grievance the
debtor has right to approach the tribunal with his claims.
Further
with respect to the contention of different treatment of the corporation and
individual by the code, for the court observed that the threshold limit for the
both entities are different and this is done for betterment of the parties
involved in it so that the tribunal doesn't get overworked and timely
resolution plan can approved.
[1] Renuka Sane, ‘The way forward for
personal insolvency in the Indian Insolvency and Bankruptcy Code’ (NIPFP, 24
January 2019) available at: https://www.nipfp.org.in/media/medialibrary/2019/02/WP_251_2019.pdf
(Visited on May 20 2024).
[2] MS Sahoo, ‘Individual Insolvency:
The Next Big Thing’, (Insolvency and Bankruptcy Board of India)< available
at: https://ibbi.gov.in/webadmin/pdf/whatsnew/2019/Apr/NewsLeter%20Jan-%20March.,%202019_2019-04-27%2017:47:25.pdf
{Visited on 1 May 2024).
[3] (2023 INSC 1018).
Article Information
A STUDY ON THE SCOPE OF INSOLVENCY PROCEEDINGS OF THE INDIVIDUAL AND PARTNERSHIP FIRM WITHIN IBC,2016
Authors: ANJALI KUMARI, PROF. DR. ANIL DIXIT
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/06/27
- Issue 7
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International Journal for Legal Research and Analysis
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