Will personal insolvency resolution now be easier?

Personal insolvency cases will be shifted out of civil courts to Debt Recovery Tribunals for cases that involve a sum more than Rs1,000

Earlier, individual bankruptcy and insolvency were governed by two laws. Photo: Reuters
Earlier, individual bankruptcy and insolvency were governed by two laws. Photo: Reuters

New Delhi: Personal insolvency cases under The Insolvency and Bankruptcy code 2016 will be handled by Debt Recovery Tribunals (DRTs). For an insolvency sum greater than Rs1,000, the cases will be moved out of civil courts to the special tribunals.

How has the personal insolvency scenario changed?

The Insolvency and Bankruptcy code 2016 completely overhauled the law, which governed corporate and individual insolvencies. In doing so, it amended personal insolvency laws, which are about 100 years old.

Earlier, individual bankruptcy and insolvency cases were governed by two laws—the Presidency Towns Insolvency Act, 1909 (for the three erstwhile presidencies of Chennai, Kolkata and Mumbai) and the Provincial Insolvency Act 1920 (for all other areas).

The Bankruptcy Law Reforms Committee report (2015) intended the infrastructure of the adjudication authorities dealing with individual insolvency to be more widespread across the country to facilitate access to justice for every citizen. It said that it would help creating economies of scale if the same judicial institutions adjudicated resolution processes for firms and individuals.

The threshold for applicability of the code to individuals and partnership firms has been set at a minimum of Rs 1,000. However, the Central government may increase the threshold to a value not exceeding Rs 1 lakh.

In contrast to the National Company Law Tribunal (NCLT), which will deal with corporate insolvency, DRT, which is the adjudicating authority for individual insolvency has a wider presence across the country.

However, the shift from district courts to DRTs for all personal insolvency cases above Rs1,000 value has been drastic. At present, there are 33 DRTs in the country spread across 23 cities as against district courts in 673 districts under various high courts.

What is the impact such a shift likely to have?

“The jurisdiction of such cases with special courts reduces the burden on the civil courts, also they have the expertise,” said Upasana Rao, partner at Trilegal, a law firm.

Some practitioners, however, express uncertainty about the jurisdiction of DRTs over individual insolvency cases.

“The existing DRTs do not have sufficient infrastructure and capacity to handle the current load. This is going to create some confusion for the time being,” said Nishit Dhruva, managing partner, law firm MDP and Partners.

Access to justice is also a question raised, given there are now fewer tribunals than district courts.

“If someone is living on the border of Karnataka, but technically in Maharashtra, he has to go to Nagpur for his hearings, where the bench hopefully would be. Still, if you have to travel 250-300km for insolvency of Rs 1-2 lakh, you’re basically making it inaccessible and costly for him. These are set ups you need to provide,” said Sumant Batra, chairman of the law firm Kesar Dass B. & Associates.

These issues can be addressed if there are sufficient back ups, according to Misha (who uses one name), partner at Shardul Amarchand Mangaldas & Co., a law firm.

“The regime was premised on the central government’s assurance to the BLRC that additional DRT benches will be set up. Also, there have been recent amendments empowering other tribunals and their judicial officers to take additional charge of DRTs, which could help reduce the additional burden,” she said.

The changes in the law show an effort to help those who suffer an inability to repay their debts, Misha added.

The current laws for individual bankruptcy have two distinct processes not available earlier. A fresh start order (FSO) and an insolvency resolution process (IRP).

Individuals can declare insolvency through an FSO, which is a process where individuals with assets and income lower than certain specified amounts will be eligible for a discharge from their debts. The qualifying debts will be written off, providing a fresh start to the debtor while the default will be mentioned in the credit history of the individual. For an individual or partnership to apply for FSO, one should have gross annual income of less than Rs 60,000, with assets of a value not exceeding Rs 20,000, and the aggregate value of the qualifying debt not exceeding Rs 35,000.

The Code also defines an IRP—a process of negotiation between debtors and creditors supervised by a Resolution Professional (RP), who is registered with the insolvency board. If the negotiation succeeds, it will lead to a repayment plan which the RP will execute. In case the negotiations fail, the matter will proceed to bankruptcy resolution process led by a Bankruptcy Trustee who is appointed by the Adjudicating Authority.