Individual insolvency for the poor on the back burner, now focus on resolving toxic assets

The government has shelved its plan to implement the so-called ‘fresh start process’ for poor people in debt under the Insolvency and Bankruptcy Code (IBC), given the complexity of the situation. operationalization of such a framework at this stage, sources said. FE.

Instead, the government will focus first on strengthening the IBC architecture to enable rapid resolution of toxic assets while preventing unscrupulous elements from playing with the system and launching the cross-border insolvency framework for businesses, the sources said.

The IBC already has provisions for the “fresh start process” for individual insolvency. It provides debt relief of up to Rs 35,000 for the poor who do not own a house, earn up to Rs 60,000 per year and have assets of up to Rs 20,000 each. However, since it marks a radical change in the way insolvency resolution usually takes place (through a court process), the IBC must first be amended to allow for the operationalization of the “fresh start” scheme.

“The idea is to first strengthen the existing insolvency ecosystem, fill in the gaps and stabilize the business insolvency resolution process (CIRP). The ‘fresh start process’ will come after that. said one of the sources.

Furthermore, the government fears that the implementation of the “fresh start” scheme could lead to a litany of legal tussles, as it could encourage lenders, in particular micro-finance institutions and those in the informal sector, to challenge the law, since the government has no plan to compensate them for the write-offs. As such, even the constitutional validity of the IBC itself has been challenged earlier and CIRP in major cases has been excessively delayed due to litigation. “So it makes sense to stabilize the IBC ship first and start a new chapter after that,” another source said.

As many as 73% of businesses, which were in resolution through December 2021, had exceeded the 270-day limit, causing the value of stressed assets to erode. Indeed, the recovery of financial creditors collapsed to a record quarterly low of 13.4% of admitted claims between October and December 2021.

BAC’s individual insolvency framework recognizes two broad categories of debtors: the poor (who meet stipulated criteria of income, assets and size of debt); and those who offered a personal guarantee to stressed businesses, owner/partner businesses (not registered under the Companies Act) and anyone else who is not covered by the first category. So far, only individual insolvency proceedings of personal guarantors of debtor companies have been implemented.

The ‘fresh start’ process was considered by a panel set up by the Indian Board of Insolvency and Bankruptcy (IBBI) under the leadership of Justice Srikrishna. It was then approved by the Insolvency Law Committee (ILC), headed by then General Affairs Secretary Injeti Srinivas, which submitted its report to the government in February 2020. Sources said that even a draft ordinance to operationalize the regime had been prepared, but it was never adopted. following the Covid epidemic.

Interestingly, under the “fresh start process”, only debtors can apply for forgiveness of their debt. Unlike corporate insolvency, the arbiter in the individual insolvency process is the Debt Recovery Tribunal (DRT), not the National Company Law Tribunal (NCLT). The default minimum amount to trigger individual insolvency is set at just Rs 1,000 (in case of corporate insolvency, it is Rs 1 crore).

However, given the small size of loans and the limited ability of the poor to go through a rigorous insolvency process overseen by the DRT, the government was considering a proposal to facilitate such waiver via out-of-court settlements. In addition, DRTs – already burdened with corporate cases under SARFAESI etc. – do not have adequate capacity to adjudicate a potentially large number of such cases. Thus, the government was evaluating the option of facilitating such a system through an administrative process, with the participation of low-cost professionals (instead of insolvency resolution professionals) and institutions at the panchayat, under the general supervision of IBBI.

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