Provisions of the Individual Bankruptcy under IBC 2016 – By CS Gaurav Joshi

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Provisions of the Individual Bankruptcy under IBC 2016

Gaurav Joshi
C.S., L.lb, R.V.(S&FA), I.D.

Introduction

Insolvency and Bankruptcy Process of an individual in India under IBC’ 2016 has gained momentum as Financial Institutions as well as the personal guarantors have started invoking provisions of Section 95 and 94 of the Code to trigger the process for resolving insolvency of personal guarantors. Some issues involving individual insolvency are being settled by way of judicial pronouncement either by Supreme Court, NCLAT or by NCLT, whereas most of the provisions are yet pass the test of judicial scrutiny.  The data issued by IBBI suggests that there are total 1612 no of application under Section 94 or 95 of the code filed by stakeholders involving an amount of Rs. 1.41 Lakh Crore. The data further suggests that till 31st December’ 2022, only 4 applications have been filed for initiating Bankruptcy Process of Individual. These numbers indicate that Individual Bankruptcy process is still at a very nascent stage. Therefore, a deeper and clear understanding among the stakeholders regarding provisions of Individual Bankruptcy is necessary so as to effectively use the provisions of Code.

Triggering of Bankruptcy Process

Bankruptcy process is the last resort in case the resolution process of Individual insolvency fails, similar to what is termed as Liquidation process in case of corporate insolvency. However, process of triggering of Bankruptcy Process is different as compared to triggering Liquidation Process. Bankruptcy Process for an Individual can commence in following 3 circumstances –

  1. In case the application filed under Section 94 or 95 has been rejected by Adjudicating Authority based on report submitted by RP that such application was made with intention to defraud;
  2. In case the adjudicating Authority rejects the repayment plan, the debtor and creditor shall be eligible to file application for Bankruptcy;
  3. In case the repayment plan approved by Adjudicating Authority comes to end prematurely and orders to that effect are passed.

It is important to note that in all the aforesaid cases, the right to file for bankruptcy is vested with the debtor or creditor as the case may be and same shall be filed independently within 3 months of the passing of aforesaid orders by Adjudicating Authority.

Appointment of Bankruptcy Trustee

Unlike the case of Liquidation Process, the Bankruptcy Trustee would the Insolvency Professional nominated by debtor or creditor whosoever would be filing the application for Bankruptcy and in case no Insolvency Professional is nominated, in that case, Adjudicating Authority can appoint Bankruptcy Trustee for panel of IBBI.

Disqualification and restrictions to Bankrupt after commencement of Bankruptcy Process

The Bankruptcy Order against the Bankrupt comes with certain disqualification and restrictions which continue to remain in force until a discharge order is passed. A bankrupt is subjected to following Disqualifications and restrictions –

  1. He can not be appointed as Trustee in a trust
  2. He can not act as public servant or elected to any public office where such appointment is by election;
  3. He can not be director of any company or take part in promotion or management of a company;
  4. He can not travel overseas without the permission of Adjudicating Authority.
  5. Bankrupt should inform all the parties regarding his bankruptcy process before entering into financial or commercial transaction.

Estate of Bankrupt and vesting of estate with Bankruptcy Trustee

Immediately after commencement of Bankruptcy proceedings, the estate of bankrupt shall be vested with the bankruptcy trustee and such vesting shall take effect without any conveyance, assignment or transfer. The estate of Bankrupt includes all the assets of Bankrupt except excluded assets or any property held by bankrupt in trust. The Bankruptcy trustee has power to sell and realise the asset that are part of bankruptcy estate and distribute realization among the creditors of Bankrupt.

Duties of Bankrupt during Bankruptcy and immunity from legal proceedings

During the Bankruptcy, the Bankrupt is duty bound to give information of his affiars to bankruptcy trustee, attending on the bankruptcy trustee and informing to Bankruptcy trustee within 7 days of any events which involves acquisition of property by bankrupt, devolution of property upon bankrupt and increase in income of bankrupt. Further during Bankruptcy process, Bankrupt has immunity by way of moratorium from any suit or legal proceedings in respect of debt of bankrupt. This immunity continues till a discharge order is passed by Adjudicating Authority.

Discharge order and its effect

Once the bankruptcy trustee complete the administration and distribution of bankruptcy estate, he can file an application for a discharge order. Code provides a maximum timeline of one year for making application for seeking discharge order. With discharge order being passed, the bankrupt will be released from all the debt except excluded debt and any debt which has been incurred by him by means of fraud or breach of trust. In other words, the bankrupt can start afresh on clean slate with extinguishing of all his liabilities other than excluded debt or any debt taken by him by fraud.

Conclusion

The provisions of the code regarding individual bankruptcy are fresh and have not been invoked by stakeholders to a significant extent. Various questions that remain unanswered that whether discharge order would also regularize the credit score, ability of bankrupt to tap credit facilities from banks etc are left to be answered in time to come. The success and impact of these provisions on behavioural changes will only be seen with time.

 

 

Disclaimer: The Opinions expressed in this article are that of the author(s). The facts and opinions expressed here do not reflect the views of IBC Laws (http://www.ibclaw.in). The entire contents of this document have been prepared on the basis of the information existing at the time of the preparation. The author(s) and IBC Laws (http://www.ibclaw.in) do not take responsibility of the same. Postings on this blog are for informational purposes only. Nothing herein shall be deemed or construed to constitute legal or investment advice. Discussions on, or arising out of this, blog between contributors and other persons shall not create any attorney-client relationship.

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