Legal Turning Point: How a Supreme Court Ruling Reimagines Personal Insolvency in India
India’s Insolvency and Bankruptcy Code (IBC) saw a landmark moment when the country introduced corporate insolvency. The new code transformed the debt relationship between the debtor and creditor in India. As of August 2023, data from Insolvency and Bankruptcy Board of India (IBBI) show 26 518 applications for insolvency resolution sought for companies that defaulted on debts worth ₹9.33 trillion were withdrawn before admission. This data demonstrates the significant impact that the threat of losing ownership had on debtors as many chose to settle their debts and resolve their distress through pre-IBC-process deals.
When personal insolvency provisions under the IBC were introduced in December 2019, personal guarantors challenged the notification at the Supreme Court (SC) in the Lalit Kumar Jain case against Union of India. The court upheld the notification and later in May 2021 ruled that liability on a guarantor does not discharge on the discharge of a company. This ruling opened the way for initiating the insolvency resolution process for guarantors.
Similarly, in the case Dilip B. Jiwrajka vs Union of India, there was a challenge on the constitutional validity of Sections 95 to 100 of the IBC at the SC. This challenge focused on the appointment and role of a resolution professional (RP) before adjudicatory hearings by the National Company Law Tribunal or Debt Recovery Tribunal (NCLT/DRT). The RP, in this case, was required to recommend whether to admit or reject the application before NCLT/DRT made a judicial determination of the appropriate choice. The attack on the sections included the following grounds: violation of natural justice for lack of debt determination by a judicial body, no hearing was conducted before the RP’s appointment, invasion of privacy since the RP empowered to seek information from third parties and finally, the assertion that personal insolvency differs from corporate concerning the RP and hearing before application admission.
The SC dismissed the challenge in Dilip B. Jiwrajka vs Union of India. Consequently, the following key findings were made:
Natural justice – The RP has to collate information from the debtor and third parties collated, submit a report to the NCLT/DRT, accompanied by non-binding recommendations and cannot be assumed to hold bias. A full-fledged evidentiary hearing is unnecessary in every case. The RP’s pre-adjudication report highlights legislative calibration intending to prevent swamping. RP appointments have no adverse civil consequences. While adjudicating on application receipt with the RP’s recommendation, the NCLT/DRT has to hold a hearing to the debtor, a demonstration of meeting the test of natural justice.
Right to privacy – The right to privacy is subject to reasonable restraints. The RP’s power to seek information relevant to the application from third-party sources is controlled, creating a balance between the right to privacy and lawful statute objectives. Therefore, the RP’s power to seek financial data does not infringe on privacy.
Corporate and individual insolvency resolutions differ – These are distinct processes. The adjudication of an initiation of corporate insolvency and RP appointment does not apply to personal insolvency. The deviations between personal insolvency and corporate insolvency initiate the RP’s involvement in corporate debt cases compared to personal insolvency. No provision provides the RP power to take over an individual’s assets or business.
Earlier, personal insolvency provisions existed under the Provincial Insolvency Act, 1920, and Presidency Towns Insolvency Act, 1909. However, insolvency was mostly argued by debtors for protection rather than by creditors due to judicial delays, among other reasons. Nonetheless, with the addition of personal insolvency under Dilip B. Jiwrajka, there is a renewed opportunity for all creditors.
Creditors and Promoters under Personal Insolvency – What Does it Mean?
The amendment to the code has given personal insolvency a fresh start for creditors in India. Corporate resolution plans have allowed creditors to retain the right to proceed against personal guarantors and access promoter collateral to recover more money and reduce the haircut imposed. Without a personal insolvency regime under the IBC, the right of creditors to achieve the same results as under the debt resolution regime previously has been restricted. This became a significant issue due to concerns about backlog in courts that resulted in delays, and litigious promoters, causing delays.
An outcome of personal insolvency may be to see repayment plans placed before creditors to resolve the issue. The introduction of simultaneous corporate and personal insolvency can provide a comprehensive resolution and address linkages between corporate and personal insolvency issues. Some of the issues include the assignment of debt by creditors under a resolution plan, availability of property owned by a promoter for company use, and subrogation of the guarantor.
The amendment to the IBC has given promoters an avenue to settle their past dues and establish themselves afresh with greater ascertainable results. Promoters who have given guarantees could spend less time on litigation and seize the opportunity to arrive at settlements and implement repayment plans. Successful implementation of the pay-back program could enable these promoters to re-access the line of credits after a cooling-off period. This opportunity presents an avenue for them or, in some cases, the next generation of family-business to participate and take part in India’s growth story.
Conclusion
The insolvency and bankruptcy code in India underwent a significant transformation in 2016 when the government of India introduced corporate insolvency. However, personal insolvency provisions faced many challenges. The recent Supreme Court ruling has breathed a fresh start to personal insolvency in India. The amendment of personal insolvency provisions in the IBC provides opportunities for both creditors and promoters in India.
The creditors can enjoy transparency and due process to pursue their debts through a comprehensive resolution mechanism. For the promoters, this provides a chance to restart their businesses with a fresh slate.
With this provisional legislation in operation, India has taken a very commendable step to re-shape its corporate and individual insolvency proceedings. The government must continuously endeavor to make necessary improvements to the provisions to protect the people’s interests in India.
Disclaimer:
The material in this article was compiled using the most recent Acts, Rules, Circulars, Notifications, Provisions, Press Releases, and material applicable at the time. The completeness and correctness of the material ensured with due diligence. It is required of users of this material to consult the relevant, applicable legislation. The data given may change without prior notice and does not constitute professional advice. As a result, Estabizz Fintech disclaims all liability for the results of using such material.
