Personal Insolvency - A Boon for the Lenders

Personal Insolvency - A Boon for the Lenders

August 09, 2022 Admin
personal insolvency insolvency resolution insolvency and bankruptcy resolution plan repayment plan non-corporate insolvency insolvency of low income corporate insolvency

Insolvency is the state of financial distress where a person or entity is unable to pay off their debts or other obligations. Resolution of Corporate and Non-Corporate Insolvency has been standardized by the Insolvency and Bankruptcy Code, 2016.


Part III of IBC, 2016 is dedicated to the repayment and fresh start for individual and partnership firms undergoing insolvency. Section 78, IBC, 2016 states --


“This Part shall apply to matters relating to a fresh start, insolvency and bankruptcy of individuals and partnership firms where the amount of the default is not less than one thousand rupees:

Provided that the Central Government may, by notification, specify the minimum amount of default of higher value, which shall not be more than one lakh rupees.”


The key to the resolution of non-corporate insolvency is the “Repayment Plan,” which is comparable to the “Resolution Plan” in case of corporate insolvency. It contains the terms according to which the debtor will pay their debts to creditors, and also provides for the manner in which the affairs of the debtors will be carried on.

Personal Insolvency - A Boon for the Lenders

The Two Routes

The Code envisages two routes for individual insolvency law:

Bankruptcy Route: Under this route, an application seeking repayment can be filed by a debtor or the creditors at the Debt Recovery Tribunal (DRT). In cases of Non-Corporate Insolvency, DRT is recognized as the Adjudicating Authority, set up under the Recovery of Debts and Bankruptcy Act, 1993. A Resolution Professional (RP) then examines the application and makes a recommendation of acceptance or rejection to the DRT.


Fresh Start Process: This route is established for resolution in case of insolvency of low-income, low-asset debtors. The Fresh Start Process ensures a lower cost of transaction in the Insolvency Resolution Process as compared with the Bankruptcy Route.


Upon admission of the application, a moratorium of six months with specific guidelines for both debtors and creditors commences, allowing for some breathing space for all parties involved.


The moratorium expires 180 days after the acceptance of the application or approval of the Repayment Plan, whichever comes earlier. During this period, the debtor is not allowed to transfer, alienate, or encumber any of their assets or legal rights nor can the creditors initiate legal action against any debt.


Who Can Invoke Personal Insolvency

Personal Insolvency proceedings can be initiated by either the debtor or the creditor (which includes financial, operational, secured, and unsecured creditors and decree-holders). The increased levels of unemployment, layoffs and unforeseen medical costs during the pandemic made people prone to debt traps. Debtors, in such situations, can avail this statutory mechanism to discharge their debt.


If the debtor fails to pay within fourteen days of service of demand notice, Personal Insolvency can be invoked by the creditors. Creditors can initiate the process of debt recovery in case of personal insolvency by filing an application under IBC, 2016 Part III, either by themselves or in coordination with other creditors. The application can be submitted either directly or through a Resolution Professional to the Adjudicating Authority (AA).


Admission of application by the NCLT u/s 100 of IBC is followed by a Public Notice inviting claims from creditors. Within thirty days of the issuance of the notice, creditors can submit their claims and be included in the list of creditors. The Committee of Creditors thus formed has to serve a fourteen-day notice for the meeting. The objective of this meeting is to discuss, approve, modify or reject the Repayment Plan and any other matter the RP or creditors think necessary.


The Voting Rights in CoC meetings are based on the value of the claim as a percentage of the total claim. Secured Creditors are entitled to vote for a Repayment Plan, only if they forfeit their security. The associates of the debtor are not entitled to vote, even if they form a part of the CoC.


Advantages for the Lenders

Unlike Corporate Insolvency, the Resolution Professional here has the right to supervise the implementation of the Repayment Plan within Individual Insolvency proceedings. This assures the creditors of greater control and transparency in the process. The provision for Personal Insolvency also increases the creditors’ expected returns.


Individual insolvency works to achieve the goals set forth in the Code. The provisions with respect to Non-Corporate Insolvency are yet to be notified. Non-corporate insolvency is therefore still covered by the Provincial Insolvency Act, 1920 and Presidency Towns Insolvency Act, 1909. These colonial-era regulations are century-old statutes and are avoided by the creditors. By virtue of section 243 of the Code, once informed, the aforementioned two laws shall be repealed and the Code shall take their place. The Code has helped open avenues for easier resolution of claims for the creditors as well as a fresh start for the debtors.

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