The chatter about the need to urgently put a legal framework on individual insolvency is gaining ground with BJP MP Suresh Prabhu and other experts making a case for operationalising such a regime in the coming days.

This legal framework must be done so that resolution is done in a time-bound manner without erosion of any asset value, Prabhu said at an IBBI event on ‘Individual Insolvency’, jointly organised virtually with the British High Commission.

“Law is very necessary. Today we must find a way of ensuring that individuals and partnerships have an institutionalised mechanism to deal with their bankruptcies”, he said.

Prabhu, a chartered accountant, said there must be a systematic mechanism to distinguish between fraudulent activity and genuine business failure.

“If business can succeed, there is almost equal chance that it can fail. Success is never guaranteed and failure is integrated in the process of success”, Prabhu said.

Reforms on individual insolvency are seen as the next big focus area for the government. The IBC currently deals with corporate insolvency and insolvency of LLPs.

Current classification

The IBC currently classified individuals into three classes —namely, personal guarantors to corporate debtors, partnership firms and proprietorship firms and other individuals to enable implementation of individual insolvency in a phased manner considering the wider impact of these measures. Already, individual bankruptcy in respect of personal guarantors to corporate debtors is in operation.

The former Union Minister’s views were echoed by Ashok Haldia, Chairman, Indian Institute of Insolvency Professionals of ICAI.

“As a process parallel to insolvency resolution for corporate person, IBC does provide for insolvency resolution and bankruptcy of individuals and partnership firms (other than LLP), where the designated adjudicating authority is DRT as compared to NCLT in case of CIRP. However, these provisions have not yet been made operational,” Haldia told BusinessLine .

With the success of the IBC regime and experience in CIRP over the last five year, experts feel the time is ripe for providing for individual insolvency. In its full-fledged format, individual insolvency is touted to be the next big thing within the IBC regime, Haldia noted.

“Not all businesses are successful . Failure is a part of life cycle of an enterprise and need a legal recourse for successful resolution or exit. Unfortunately, for honest businessmen failure or inability to settle creditors is a stigma and a nightmare. The regime under IBC when made effective would enable an entrepreneur in severe financial distress to live with dignity socially and economically, and would enable him to channelise again his entrepreneurial talent and skills for productive purposes”, Haldia said.

Haldia said that while pursuing individual insolvency processes, there are few similarities and differences as compared to Corporate Insolvency Resolution Process (CIRP). The skill sets and focus areas while managing an individual insolvency could differ from those in CIRP. Therefore, it is imperative for the ecosystem, and the IPs in particular to prepare themselves for approach , attitude and adopt processes that are compassionate, efficient, cost-effective, and compatible with individual insolvency, he said.

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