Fresh Start Process in India and United Kingdom – By Hariharran

Fresh Start Process in India and United Kingdom

Authored by: Hariharran
B.Com.LL.B (Hons), Pursuing Graduate Insolvency Programme (GIP) at Indian Institute of Corporate Affairs 2022-2024 

Introduction

As the words suggests “Fresh start” means “to start something again in completely new way”. Fresh start process under insolvency bankruptcy code 2016 is envisaged as a solution for debtors to discharge their debts and start afresh without any pending balance/ liabilities. The Fresh start process is envisaged in chapter-II of Part-III of the IBC which is yet to be notified.

The adjudicating authority for the fresh start process which is for individuals is the debt recovery tribunal as default.

Why fresh start process?

Fresh start process allows individuals to restart his/her life afresh without any debt pending.

In this case the chances of recovery would be low and the insolvency resolution process would constitute an additional burden on stakeholders. The aim is therefore to provide the debtor a “Fresh Start” in terms of their financial affairs by reliving the repayment of qualifying debts.

This is known as “Earned Start” where a debtor is expected to repay her debts and is given to discharge when such debts are repaid. It is difficult to establish the amount of credit from banking sector that is disbursed to individuals as opposed to limited liability companies. Though personal insolvency is yet to be notified in IBC, but when notified, becomes operational in a credit market that has evolved over several decades in response to weak creditor rights on recovery, and weak debtor rights on stalling creditor enforcement. The credit market is also given more importance on agricultural loans and other loans of lower income.

When the loan is settled or written-off by a lender, it will show as such on the credit report and impact access to credit in the future. While providing this relief, borrowers must be made aware that this waiver may impact their credit report and score which, in turn, affects their access to credit in future.[1]

The Code could be a remedy to this credit market of Individuals. Insolvency and Bankruptcy Code provides three insolvency procedures for individuals. While the Insolvency Resolution and Bankruptcy process are available to all, Fresh Start, a part of IBC is one such process that applies to low-income individuals who have small debts. Just like the words ‘Fresh Start’ means ‘to start something again in a completely new way.’ Similarly, fresh start processes under the Insolvency and Bankruptcy Code, 2016 is envisaged as a solution for debtors to discharge their debts and start afresh without any liabilities.

The fresh start process is enshrined under Part III of the code which is not notified. Adjudicating Authority Part III of the code means the Debt Recovery Tribunal which is considered to be the authority of the Fresh start process.

The fresh start process is loosely modelled on the debt relief order (DRO) regime available in the United Kingdom which was introduced in 2009. The concept of fresh start process is also available in the bankruptcy laws of the United States.

Debt relief order is a way of dealing with your debts if you cannot afford to pay certain kinds of debts for a specified period of preceding 12 months. At the end of DRO period the debts included it will be written off as discharges and won’t have to pay them. If the income or circumstances changed from the date of DRO then the DRO may be revoked so you can pay your creditors the person/company you own money to.[2]

This is a gist about the fresh start process lets discuss about it in brief.

QUESTIONS

  1. What constitute for the Fresh start process?
  2. What is the concept of excluded and qualifying debts?
  3. What is the role of resolution professional in FSO?
  4. Does moratorium apply for fresh start process?
  5. How does United Kingdom and India share the of Fresh start process? Explain the similarities which go hand in hand and the differences among the two countries?

Findings

1. What constitute for the Fresh start process?

In order for a fresh start the threshold under sec-80(2) of the code must be filled by a debtor as per the rules in order to initiate a fresh start process. The code contains only for individual application and a debtor cannot file for FSO with spouse or any partner. The eligibility under sec-80(2) are given as follows.

The eligibility for the Fresh start process is:

  1. The maximum gross annual income of Rs. 60,000;
  2. Maximum aggregate asset value of Rs. 20,000;
  3. Maximum aggregate qualifying debt value of Rs. 35,000;
  4. The debtor does not own a dwelling unit, regardless of whether it is encumbered or not;
  5. The debtor is not an undischarged bankrupt;
  6. There are no pending Fresh Start, insolvency resolution or bankruptcy proceedings against the debtor; and
  7. There have been no FSOs under the Code passed in relation her in the preceding twelve months. [3]

These thresholds are not envisaged to be static and can be revised periodically. As per the Report of the Bankruptcy Law Reform Committee (‘BLRC’), the eligibility thresholds should ideally be increased at regular intervals in line with inflation measured by the Consumer Price Index.

Thus, these are the prime eligibility criteria with lieu of the income earned by the debtor in case of filing for FSO.

Along with the main application other annexures to be attached in order of prove the above given details:

As per Section 81(4) of the Code, the following information must be filed with the application, supported by below annexures:

The evidence of compliance with these criteria must be filed as a part of the application

  1. A list of all debts due on the date of the application, along with amounts due on such debts, the interest payable and the list of creditors;
  2. the rate of interest stipulated in any contract in relation to the debts;
  3. A list of security in respect of the debts;
  4. The financial information of the debtor and her immediate family up to two years prior to the date of filing the application. The term ‘immediate family’ means spouse, dependent children and dependent parents of the debtor;
  5. Personal details of the debtor, the reason for making the application and details on any pending legal proceedings against the debtor; and
  6. A confirmation that no fresh start order has been made in relation to the qualifying debts of the debtor in the preceding twelve months. [4]

It is clear that AA and RP will have all the access to the financials of related parties when the application is filed. Therefore, in case there is dwelling unit in the name of a spouse or child, or a member of the immediate family has assets with value greater than Rs. 20,000, the RP and eventually the AA will use their own discretion in deciding whether the debtor is eligible for an FSO.

2. What is the concept of excluded and qualifying debts?

Qualifying debts

The Code also defines ‘qualifying debts’, which are understood to be the debts eligible for discharge under the FSO. Qualifying debts do not include secured debts, or debts incurred in the three months preceding the application for an FSO. An indicative list of qualifying debt includes, but is not restricted to, credit card debt, unsecured bank overdrafts and loans, unsecured loans from finance companies, credit from money-lenders, employers, friends and family, and debts to customers who have paid for goods or services that the debtor was unable to supply.

Excluded debts

‘Excluded debt’ includes court fines, child support payments, student loans, money owed under a criminal charge, and debts resulting from certain personal injury claims against the debtor.

Debts which are getting pass the criteria can either be excluded or qualified to be exempted from calculation of the whole debts of the debtor.

3. What is the role of resolution professional in FSO?

The resolution professional (‘RP’) is crucial in Fresh Start, as they handle the process wholly.

 Section 83 states once the RP is appointed, the RP must scrutinize application for a FSO within 10 days of appointment, and decide if the applicant is eligible for the FSO. 

In case of existing disputes under Section 83(6) are present, the RP will recommend on rejection of the application. If not, the RP will exercise discretion in recommending acceptance of the application. After recommendation from the RP, the AA will then scrutinize the FSO application, and decides upon acceptance/rejection. The AA has highest discretion in accepting or rejecting the application for an FSO. [5]

On acceptance of the FSO, the order of the AA must also state the amount accepted as qualifying debts, and other amounts eligible for discharge.

The RP has major role in the process on admission of the application. The RP is required to prepare and confirm a final list of qualifying debts, and submit such list to the AA.  The creditors can object to the debt included as a qualifying debt on limited grounds.

The RP is duty bound to consider each objection, to accept or reject each objection within the time period. Further, the RP is given the power examine any matter and take any appropriate action that they feel relevant, in order to prepare a final list of qualifying debts.

This shows that the RP is expected to use their power in preparing the final list of qualifying debts. They may also apply to the AA for directions for final approval. The final list of qualifying debts must be submitted to the AA before last 7 days before the moratorium period ends.

As per Section 87, a debtor or creditor who is aggrieved by decision of the RP can make an application to the AA within 10 days of their action. The grounds of challenge under this provision are

(i) failure of the RP to provide the debtor or creditor the opportunity to make a representation;

(ii) the RP colluding with a party to arrive at a decision; or

(iii) failure to follow the procedural requirements for hearing creditor objections and preparing the final list of qualifying debts. The creditor and debtor have also been given the power to apply for the replacement of the RP in case they are aggrieved by the conduct of the RP.

 In addition, the RP is required to adhere to the prescribed code of conduct set out in Section 208 of the Code. These provisions also act as a check against the RP’s conduct jeopardizing the FSO.[6]

4. Does moratorium apply for fresh start process?

Yes, Moratorium apply for fresh start process.

There are two stages at which a moratorium takes effect in the process for an FSO.

First stage

Once upon the filing of an application with the AA, an interim moratorium takes effect.

This interim moratorium makes sure all pending legal action against the debtor’s unpaid debts are stayed, and an obligation is issued on fresh legal proceedings being started by any creditor. The object of this interim moratorium is to provide a proper situation for the debtor to have a fresh start process, and there is penalty on wrong usage of law. The interim moratorium shall apply from the date of submission of application up to the date on which such application is admitted or rejected by the AA.

Second Stage

A moratorium also restarts from the date of FSO application is accepted by AA. In this moratorium period, any creditors are denied to initiate any proceedings to recover debts against the debtor. The stay on old legal proceedings in respect of the debts continues.

In effect, the creditor does not have a remedy in respect of the debt for the duration of the moratorium period.

On FSO, the moratorium will remain for 6 months from acceptance of the application. During this period, there are restrictions on the debtor as well, which includes their ability to promote/form a company, perform as director, sell/alienate assets and to travel outside jurisdiction. These limitations apply till the debtor is awarded a “fresh start”

Even during the DRO process, similar limitations will be imposed on the debtor during the DRO period, and on certain situations extended even after the debt relief has been provided.[7]

Thus, these two stages are crucial part of moratorium being applied upon before and after admission of application of FSO.

5. How does United Kingdom and India share the of Fresh start process? Explain the similarities which go hand in hand and the differences among the two countries?

Debt relief orders came in United Kingdom from 2009 under tribunals and courts. Part-7A of the UK Insolvency act 1986 has the provisions of DRO. DRO can be applied only for people with relatively low income and little assets who are unable to pay the debts within prescribed time period.

The eligibility criteria for DRO in United Kingdom are to satisfy the following conditions

  1. The debtor has been a resident of, or has conducted business in England and Wales in the last 3 years;
  2. The debtor has not obtained a DRO in the last 6 years;
  3. The debtor is not an undischarged bankrupt, or involved in any formal insolvency proceedings
  4.  The value of non-exempt assets is below £1000 (Rs. 82,790 approximately);
  5. The value of the debtor’s vehicle is less than £1000 (Rs. 82,790 approximately);
  6. The value of unsecured debts is less than £20,000 (Rs. 16,55,800 approximately);
  7. The surplus income of the debtor, after paying taxes, household expenses and national insurance is £50 (Rs. 4,139 approximately);

Other key criteria to be met by the debtors in UK

The debtor who has entered into any transactions that undervalue or preferential transactions in the past two years would not be eligible for a DRO.

According to the explanatory notes to this section, this prohibition has been inserted for:

  • protection of investors right; and
  • to avoid where a debtor has sold off the assets as to qualify for DRO.

the application will be taken up by the official receiver, who scrutinizes the financial affairs of the debtor to arrive to a conclusion, and may order for further information/supporting documents.

Once the DRO order has been issued, it will be in effect for 12 months. During the 12-month period, the unsecured creditors cannot enforce their claims. The debtor will not be obliged to make payments of unsecured claims. But secured creditors can still enforce their security against the debtor.

The DRO will only be issued debts under the category of qualifying debts.

Qualifying debts are those which should be paid in full or in partial in present or in future, and do not include excluded debt.

 These include

  • Warning any lender of the DRO when the borrowing limit exceeds £500;
  • prohibits from acting as a director of a company,
  • create or promote a company without the permission of the court. In case there is any positive increase in the financials of the debtor, the debtor is obliged to inform the official receiver.

On completion of the period of 12 months the debtor will be discharged from all the qualifying debts. But the debtor will be liable in respect of other debts.

The court upon application from the official receiver the court imposes certain restrictions upon the person after DRO. This is called the Debt Relief Restrictions Order. The debtor must comply to the restrictions in form of Debt Relief Restrictions Undertaking, without going to court.

The debts which have to be paid even after the DRO. These are not covered under the DRO

  • child maintenance, or anything under family proceedings
  • student loans
  • budgeting and crisis loans from the Social Fund
  • debts secured against an asset
  • fines for drugs related offences
  • fines a court has ordered you to pay
  • unpaid TV license fees
  • rent and bills of regular in nature to be paid.
  • any debts you incur after the DRO is granted

On violation of any such conditions may result in

  • a bankruptcy order of the debtor
  • prosecution, borrowed debt without informing the creditor about DRO

These are the similarities between Indian and UK law on fresh start process but there are some major differences between these two laws are differentiated below.[8]

Differences between the fresh start process and the Debt relief order

  • Under the DRO, at the completion of the moratorium period, the debtor is discharged from all of the qualifying debts. But in India, it is necessary for the AA to pass a discharge order at the completion of the moratorium, which will discharge the Individual from all the liabilities levied in respect of the qualifying debts.
  • The DRO application is accepted and scrutinized by the official receiver, of the bankruptcy court. In India the for an application under FSO, the RP should examine the application at the first stage. The RP plays an important role in the fresh start process. However, the decision on the acceptance/rejection of the application is taken by the AA, which is the Debt Recovery Tribunal.
  • In UK, the application for a DRO cannot be directly submitted by an individual, and definitely involves the participation of official receiver of the court. In India an application for Fresh Start process can be made personally by a debtor himself, but an RP would be appointed by the court to drive the process.
  • In UK, the creditor has a right to object on making of the order itself, for not merely the inclusion of debt as a qualifying debt. On the basis of creditors stand, the DRO may be revoked/cancelled. On contrast, under IBC, the creditor can only object to the inclusion of the debt, or inform the incorrect information in relation to the debt under the Fresh Start, and cannot object on the FSO being made by court. This is because the final discharge for the debtor is not automatic under the law, as it will take place upon the discharge order by the AA.
  • In the UK, the restrictions on the debtor will prevail for the period of moratorium during the DRO, and may also continue after the discharge by court. However, in India, there are restrictions on the debtor during the period of moratorium, these restrictions will be removed upon the passing of the discharge order by AA.[9]

CONCLUSION

Fresh start” is a first step to free up the debtors from the old legislation of the colonial era such as the Presidency-Towns Insolvency Act of 1909 and the Provincial Insolvency Act of 1920 but the debtors need some guidance and assistance from misuse of the law. Many institutions from microfinance industry and commercial banks which lend money to such institutions apprehend that such a legislation in India will encourage small unsecured debtor to default which will eventually destroy the credit culture. It is important to understand that this process do not “erase” a debt; the discharge order is an injunction that makes a debt uncollectible. But this process will provide relief to small debtors there are various concerns in its implementation procedure. One of the major drawbacks to seek a fresh start, that the debt recovery tribunals (DRT) and there are very less than across the country. It will be difficult at times for small borrowers to get relief and make a “fresh start”. However, the government may start to set up special benches or vesting jurisdiction with another judicial body across the nation. The biggest drawback for the government is to educate the debtors about the process. The issues are being very well worked upon and the implementation of this new process would set new standards in the insolvency legislation in India.

Thus, these are the concept of fresh start process and the impact of DRO in UK and India.

 

Reference:

[1]  https://www.livemint.com/money/personal-finance/will-fresh-start-bankruptcy-law-forsmall-debts-help-borrowers-1560967082875.html

[2] https://www.gov.uk/government/publications/getting-a-debt-relief-order/getting-a-debt-relief-order

[3] https://ibclaw.in/section-80-eligibility-for-making-an-application/

[4] https://ibclaw.in/section-81-application-for-fresh-start order/#:~:text=(1)%20When%20an%20application%20is,as%20the%20case%20may%20be.

[5] https://ibclaw.in/section-83-examination-of-application-by-resolution-professional/#:~:text=(1)%20The%20resolution%20professional%20shall,or%20rejection%20of%20the%20application.&text=(b)%20liabilities%20eligible%20for%20discharge,(3)%20of%20section%2092.

[6] https://ibclaw.in/section-87-application-against-decision-of-resolution-professional/

[7] https://icsiiip.in/panel/assets/images/research_articles/16331679412848IJMER%20volume9-issue2(2)-2020.pdf

[8] https://www.gov.uk/government/publications/getting-a-debt-relief-order/getting-a-debt-relief-order

[9] http://www.parliament.uk/commons-library

 

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