The Insolvency and Bankruptcy Code (IBC) aims at improving the failing credit market situation in the country. A healthy credit market functions well where the debtor and the creditor have faith that their interests are recognised and protected under law.
Failure to pay debt is a common occurrence but surprisingly, the law dealing with such situations is under-developed, fragmented and unpredictable, to say the least.
This anomaly led to the setting up of the Bankruptcy Law Reform Committee which unlike its predecessor committees, had the tremendous mandate of bringing about comprehensive reforms in the form of a complete code on insolvency law. With it, the idea of piecemeal reforms, which has been the leitmotif of an itinerant reform process for decades, was discarded for good.
The consolidated code encapsulating the laws relating to insolvency and bankruptcy for corporates, individuals and partnerships was introduced in the Lok Sabha and referred to the joint parliamentary committee, whose report is awaited.
The Ease of Doing Business rankings by the World Bank depend on how easily corporate entities resolve their insolvency, however, the less discussed albeit equally significant will be provisions relating to insolvency resolution of individuals.
Personal insolvency in the country has been governed by the archaic Presidency Towns Insolvency Act, 1909 or the Provincial Insolvency Act, 1920, depending on where in India one is located.
These laws have not been revised for over a century and are quite naturally outdated, unpredictable and unworkable. The basic defect is an over-involvement of the judicial machinery at every step of the process, leading to delays, uncertainty and prolonged litigation.
Restructuring of debts is not a real possibility, liquidation is available as an option of first and not last resort and a debtor can be subject to criminal proceedings on failure to repay the paltry sum of ₹500.
Needless to say, the ineffectiveness of the laws for both creditors and debtors compels them to resolve their affairs out of court, without any legal protections. As a result, might becomes right and a range of unscrupulous practices ensue.
Towards a reformed law The IBC proposes to replace the existing law to facilitate the debtor to start afresh financially with an easy exit from insolvency without harassment. It assures the creditor of repayment of debt to the maximum extent possible, by providing procedural and judicial predictability in the legal system and a genuine platform for debtor-creditor negotiation.
In society, the stigma attached to bankruptcy is high and thus, the focus of personal insolvency process is on restructuring of debts. A debtor has to necessarily attempt repayment of his debts through a negotiated repayment plan, and only on a failure of such plan can he be taken to bankruptcy.
The commencement of bankruptcy is not automatic as its consequences on the reputation and creditworthiness of an individual are grave. These mechanisms are envisioned to be used by all types of debtors, including high net-worth individuals of the likes of Vijay Mallya and Subroto Roy.
A significant feature of the IBC is the fresh start process, which is a debt relief mechanism envisaged for indigent persons like farmers and micro-finance borrowers unable to pay their debts due to little or no money and assets.
In its recent report on farmer suicides in India, the National Crime Records Bureau observed that in 2014, bankruptcy or indebtedness was the leading cause for farmer suicides in the country.
Farmers’ suicides It accounted for 20.6 per cent farmer suicides, and most of them were due to failure to repay crop loan. The State of Maharashtra reported the highest number of farmer suicides and a third of the suicides were due to bankruptcy or indebtedness. With such glaring figures, the problem of farmer suicides is massive and requires to be addressed immediately and effectively.
Sporadic government schemes providing for debt waiver are not a feasible solution and are more often than not, politically motivated. A credible solution to this grave problem could be the fresh start process, through which a poor farmer can obtain a judicial order writing off his debts up to an amount of ₹35,000.
The process is of course not automatic; however, an individual who is genuinely unable to pay his debts due to his financial circumstances, files correct financial information and satisfies the eligibility criteria, has a good chance of obtaining debt relief within the parameters of the proposed law.
If successful, this process will go a long way in reducing the incidence of farmer suicides and thus, herald a new beginning for resolution of personal insolvency. The success of the personal insolvency regime under the IBC depends on the effective functioning of the surrounding infrastructure.
For instance, illiterate individuals will largely depend on insolvency professionals to file their applications and handle their affairs, which calls for the development of a market of professionals who are honest and efficient.
Making it work
The target of the fresh start process being farmers and underprivileged persons, educating them of their rights is indispensable to make the process work.
Past experience has shown that a major impediment in insolvency resolution is protracted litigation around the validity of debt. This can be bypassed by storing debt-related information in ‘information utilities’ as proposed under the IBC, as such information will be considered to be indisputable.
An overburdened judiciary is toxic to the workability of any law. Thus, multiple benches with presence at district level is an essential requirement for the law to be accessible to one and all.
The government is determined to go ahead with its reform agenda, the IBC being its top priority. With the possibility of the code being made into law in the near future, swift and concrete steps are required to upgrade the existing infrastructure as well as put in place the infrastructure required under the IBC, with special focus on personal insolvency.
Only then will the IBC live up to its promise of mitigating the plight of the debt-ridden Indian caught between the Scylla of the badgering creditor and the Charybdis of suicide.
The writer is Research Fellow, Vidhi Centre for Legal Policy