Three Months Certificate Course (Online) in

Insolvency and Bankruptcy Laws and Procedure

Module 1: Introduction to Insolvency and Bankruptcy Regime in India

Unit- 5: Recovery of Debt from Individuals and Enterprises other than

Corporate Persons1

As noted in our previous units under this Module, the stream of insolvency laws can be
segregated chiefly under two heads, i.e. Personal Insolvency, which deals with
individuals and partnership firms governed by Provisional Insolvency Act, 1920 and
Presidency Towns Insolvency Act, 1908 and Corporate Insolvency, whose
2
consequence is winding up of the corporate person . In this Unit we would discuss the
scope of the provisions relating to recovery of debt from individuals and enterprises
other than corporate persons.

In India lending and then recovery of debt has not only been associated with legal and
economic issues, but largely social issues 3 . Historically, the debtors were always
depicted as poor people including small entrepreneurs and lenders were well-to-do
people. Shri. Munshi Premchand in his famous Hindi novel Godan (The Gift of a Cow)
depicts the plight of a poor villager4 and revolves around taking debt and repaying the
same and difficulties faced. Also the famous figurative way of referring the harsh
demands of a lender – “a pound of flesh” by Shylok in the classic ‘Merchant of Venice’5.
In recent times, the movies like EMI6, portrayed the plight of an individual debtor at the
hands of collection agents who say “Loan liya hai to chukana padega” (if you take a
loan then pay for it).

1
Module developed by Dr. Vijay Kumar Singh, Associate Professor & Head, School of Corporate Law,
IICA
2
under the Companies Act, 2013, Insolvency and Bankruptcy Code, 2016 and Limited Liability
Partnership Act, 2008
3
Recently, IBBI had set up an Advisory Panel under Justice B N Srikrishna to take the process forward
on bankruptcy regimes for individuals. “The composition of the advisory committee shows the
recognition in the government that this is a sociological issue and not merely a subject involving default
in payment of loans or other dues to creditors. The issue has become even more challenging, following a
spate of recent insolvency cases involving real estate companies such as Jaypee and Amrapali Group” –
Times of India Sept 18, 2017, available at http://timesofindia.indiatimes.com/business/india-
business/govt-sets-up-personal-bankruptcy-panel/articleshow/60724960.cms
4
First published in 1936.
5
The Merchant Of Venice Act 4, scene 1, 304–307
6
2008 Movie directed by Kabra and Khanna starring Sanjay Dutt.
Criminal don-aspiring politician Shabbirbhai runs a collection agency in Mumbai's Bhendi
Bazar called 'Good Luck Recovery'. He had started this business with 4 employees, but now has
over 400 of them. He uses his influence and goon-power to mainly recover money from middle-
classed clients of All India Bank.

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LiveMINT
In a shocking incident, Mumbai resident Prakash Sarvankar, 38, an xx Bank Ltd
customer who had taken an Rs 50,000/- personal loan, committed suicide in 2007 —
accusing a recovery agent for his death. Such incidents have made the recovery agent
a feared character. RBI has issued guidelines on training recovery agents and the
methods they can adopt for collection. “All our agents have gone through the approved
and mandatory training as per the regulator’s guidelines,” said Manju Bhatia, joint
managing director, Vasuli.com, a recovery firm which deals with collections on secured
loans. According to the Banking Codes and Standards Board of India (BCSBI) 7, “the
collection policy is built on courtesy, fair treatment and persuasion.”8

The Government has been conscious of this issue and as the matter relates to the
State Governments9, States have come up with their respective Money Lender’s Law10
to provide for regulation and control of the business of money lenders 11 . An
examination of the money lending legislations in different states of India shows that the
provisions are generally similar12. The common features of these state legislations are
as follows:
 Requirement of registration/license for carrying on the business of money
lending within a State/a portion of the State and penalties for carrying on
business without licence;
 Maximum rates of interest that can be charged;
 Duties of the moneylenders with respect to maintaining and providing statement
of accounts to the debtors;
 Penalties for intimidating the debtors or interfering with their day-to-day
activities, including the cognizability of such offences;

Predatory Lending in India is controlled by the Usurious Loan Act, 1918 which
provides for control on predatory lending in India has an objective to protect borrowers
from avaricious money lenders who, taking advantage of borrowers in need of money,
charge excessively high rate of interest. The Usurious Loan Act, 1918 mainly applies
lending by private parties.

7
http://www.bcsbi.org.in/
8
http://www.livemint.com/Money/9Dram94rdVwReoP2MN8bUM/Keep-these-rules-in-mind-while-
facing-a-loan-recovery-agent.html
9
Matters pertaining to private money lending and moneylenders fall in the State List, i.e. List II, in Part
XI of the Constitution of India. Therefore, state specific laws would apply on the subject accordingly.
Almost every state in India has its own money lending legislations by which such activities are governed
in the state.
10
Some States have enacted separate legislations governing the business of pawn-broking, while others
have incorporated separate provisions for pawnbrokers within the money lending legislation itself. For the
purposes of this report, we have focused on the legislations dealing with money lending, leaving aside the
laws governing pawn broking.
11
For e.g. the Kerala Money Lenders Act, 1958. For a list of all State Acts, please visit
https://sachet.rbi.org.in/StateActs/Index
12
Vivek Kumar Verma, Requirement of Registration For Private Money Lending In India, Indian Case
Laws, available at https://indiancaselaws.files.wordpress.com/2014/04/requirement-of-registration-for-
private-money-lending-in-india.pdf

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The Usurious Loans Act provides power for the Courts to intervene with respect to any
loan transaction, where a Court has reasons to believe that:
 The interest charged is excessive; and
 The transaction between the parties was substantially unfair;

In case of a predatory lending, then the Court has the option to exercise the following
powers:
 Re-open the transaction and relieve the debtor of all liability in respect of any
excessive interest;
 Relive the debtor of all liability in respect of any excessive interest and if
anything has been paid in excess, order the creditor to repay any sum which it
considers to be repayable;
 Set aside either wholly or in part or revise or alter any security given or
agreement made in respect of any loan and if the creditor has parted with the
security order him to indemnify the debtor in such manner and to such extent as
it may deem just;

It’s important to note that the Usurious Loans Act is only applicable to private loans or
loans made in the unorganised sector. Banks and financial institutions in India are
governed by the Reserve Bank of India (RBI), Fair Practices Code13. Hon’ble Supreme
Court has also in its decisions like ICICI Bank Ltd. vs. Prakash Kaur & Others14 has
reiterated that “we are governed by rule of law in the country. The recovery of loans or
seizure of vehicles could be done only through legal means. The banks cannot employ
goondas to take possession by force.”

The issue of money lenders has not died down and in the year 2006 RBI constituted a
Technical Group15 to study the matter which noted:
The All-India Debt and Investment Survey as on June 30, 2002 (NSS Fifty-
Ninth Round released in December 2005) had shown that the share of
moneylenders in the total dues of rural households had increased from 17.5 per
cent in 1991 to 29.6 per cent in 2002. Considering that high indebtedness to
moneylenders can be an important reason for the distress amongst farmers, the
Reserve Bank Governor announced in the Annual Policy Statement dated April
18, 2006 for the year 2006-07, that a Technical Group would be set up to review
the efficacy of the existing legislative framework that governs money lending.
13
https://rbi.org.in/scripts/NotificationUser.aspx?Id=1172&Mode=0
14
(2007) 2 SCC 711 dated 7.12.2006 delivered by HMJ Altamas Kabir on behalf of Dr. Lakhsmanan J
and himself. (Matter related to taking forceful possession of truck taken on loan).
15
Report of the Technical Group to Review Legislations on Money Lending 2006

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The Group would also review the enforcement machinery in different States and
make recommendations for its improvement16.

Report also quotes the then Hon’ble Prime Minister17:

“…We need more thinking on the credit front. While the financial system should
do more for the credit needs of farmers, we need to raise some questions. What
do farmers need – a lower rate of interest or reliable access to credit at
reasonable rates? Is our existing institutional framework adequate for meeting
the requirements of our farmers who are a per se lot? Do we need to create new
institutional structures such as SHGs, micro finance institutions, etc, to provide
improved and reliable access to credit? Or do we need to bring in Moneylenders
under some form of regulation? It is necessary that we find answers to these
questions in the near future.'

One of the major challenges then was lack of formal channels of investment and focus
on financial inclusion to ensure access to financial services namely Banking Savings &
Deposit Accounts, Remittance, Credit, Insurance, and Pension in an affordable manner.
Pradhan Mantri Jan Dhan Yojana launched on 28th August, 2014 attempts to address
this gap.

Other than the private money lenders, the recovery of loan by formal channels like
banks, non-banking financial companies (NBFCs), etc. is an important issue. Loans are
given to the individuals by way of home loan, consumer loan, personal loan, credit
cards etc. and recovery of the same needs to be streamlined for proper recovery and
mechanisms of bankruptcy. Robust banking regulation and a sound bankruptcy process
share a common goal: to recognize bad news and act quickly18.

Report of the BLRC notes “Firms can be liquidated, but individuals cannot. Many
concepts in the IRP, such as obtaining a new owner with a revival plan, are not
applicable for individuals. Hence, a simplified process is envisaged for default by
individuals. This includes a concept of a “Fresh Start” where specified loans of a

16
https://rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=513
17
Hon’ble Prime Minister of India, Dr. Manmohan Singh (in his address at the 2nd Agricultural Summit,
October 18, 2006)
18
http://www.livemint.com/Opinion/JvEqJkiuY7lTCsFk54XxrJ/How-bankruptcy-code-will-save-
lenders.html

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 Three Months Certificate Course (Online) in
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limited class of borrowers can be waived, but this information about individual
bankruptcy will reflect in the records of the individual.”19
[Module V of this Course deals with the Insolvency Resolution and Bankruptcy for
Individuals and Partnership Firms in detail]

In the Individual Credit landscape, one can categorise the borrowers as follows20:
Borrowers Lenders Products

 Scheduled Commercial  Auto Loans

Banks  Home loans/ loan
 Cooperative banks against property
 Regional rural banks  Two wheeler /
consumer durable loans
 Non-bank finance
 Loan against gold /
institutions
 Individuals / HUFs  Housing finance
shares
 Education loans
 Self-help / Joint companies
 Personal loans
Liability Groups  Micro finance
 Credit cards
institutions
 Unincorporated  Business loans
 Cooperative credit
businesses (say  Commercial vehicle
societies
finance
partnership firms) ………………………….
 Construction equipment
 Small finance banks
finance
 e-commerce platforms  Agri/tractor finance
 payment aggregators  SHG (Small Help
 peer-to-peer lending Group/ (Joint Liability
platforms Group) JLG loans
 others (?)  Kisan Credit Cards

Historical Perspective21:
The need for an insolvency law in India was first articulated in the three Presidency-
towns of Calcutta, Bombay and Madras. The earliest rudiments of insolvency legislation
can be traced to sections 23 and 24 of the Government of India Act, 1800, which
conferred insolvency jurisdiction on the Supreme Court at Fort William and Madras and
the Recorder's Court at Bombay. These Courts were empowered to make rules and

19
Para
20
Anjali Sharma, Framework for debt recovery in India, IGIDR – IFF roundtable on individual
insolvency, July 29, 2016
21
http://www.iica.in/images/confdetailpaper/Country_Report_on_Corporate_Insolvency_laws.pdf,
Prepared in the Directorate of Academics and Professional Development, the ICSI

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order for granting reliefs to insolvent debtors on the lines intended by the Act of the
British Parliament called the Lord's Act passed in 175922.

The passing of Statute 9 in 1828 (Geo. IV. c. 73), can be said to be the beginning of the
special insolvency legislation in India. Under this Act, the first insolvency courts for
relief of insolvent debtors were established in the Presidency-towns. Although the
insolvency Court was presided over by a judge of the Supreme Court, it had a distinct
and separate existence. The Insolvency Court was to sit and dispose of insolvency
matters as often as was necessary. But the Court at Calcutta was to sit at least once a
month. The Act of 1828 was originally intended to remain in force for a period of four
years, but subsequent legislation extended its duration upto 1843 and also made certain
amendments therein23.

A further step in the development of Insolvency Law was taken when the law in 1848
(11 & 12 Viet.c.21) was passed. The Act presumed the distinction between traders and
non-traders in certain respects on the lines of the corresponding Bankruptcy statutes,
then in force in England. It continued the Courts for the relief of insolvent debtors
established by the Act of 1828 in the Presidency towns and in their place the present
High Courts were set up. The insolvency jurisdiction in the Presidency towns was thus
transferred from the Supreme Court to the High Court

The Provisions of the Indian Insolvency Act, 1848, were, however, found to be
inadequate to meet the changing conditions. In the eighteen seventies Sir James
Fitzjames Stephen proposed an Insolvency Bill for the whole of India modelled on the
Bankruptcy Law then in force in England. But this proposal was dropped, as the
conditions in India in general were not favourable for a compulsive legislation on the
subject. The Act of 1848 continued in force in the Presidency-towns until the enactment
in 1909 of the present Presidency-towns Insolvency Act, 1909. While there was special
insolvency legislation for the Presidency-towns, there was no insolvency law in the
rural areas. The main reason for this difference was the absence of any flourishing trade
and commerce therein24.

22
J P S Sirohi, Law of Insolvency(1985)
23
See Mulla Law of Insolvency in India(1958), P.16
24
C. Waren, Bankruptcy in United States History 3 (1935), cited in McIntyre, Lisa J. (1989)
"A Sociological Perspective on Bankruptcy," Indiana Law Journal: Vol. 65: Iss. 1, Article 6. Available at:
http://www.repository.law.indiana.edu/ilj/vol65/iss1/6. Also read Teresa A. Sullivan, Elizabeth Warren,
and Jay Lawrence Westbrook, As We Forgive Our Debtors: Bankruptcy and Consumer Credit in
America, Oxford University Press, 1989

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In the rural areas for a considerable period the ordinary principle of distributing the sale
proceeds pro-notes among decree-holders after satisfaction in full of the amount due to
the attaching decree holder seems to have prevailed. The first attempt to introduce
insolvency law in the rural areas was made in 1877. Some rules were incorporated in
Chapter 20 of the Code of Civil Procedure, 1877, which conferred jurisdiction on the
district Courts to entertain insolvency petitions and grant orders of discharge, these rules
were re-enacted with certain modifications in Chapter 20 of the Code of Civil
Procedure, 1882. The Provisions in the Civil Procedure Code of 1859 were described as
the "germ and nothing more than a germ of an insolvency law." The provisions were
limited to cases in which legal proceedings were instituted and judgment obtained.
Creditors of a debtor were not entitled to file an insolvency petition. These defects were
removed by the provincial Insolvency Act, 1907. This Act created a special Insolvency
Jurisdiction laying down the conditions under which a debtor could be adjudicated on
his own petition or on a petition by a creditor. The Act of 1907 was repealed by the
provincial Insolvency Act, 1920 which is the Act now in force in the areas other than
the Presidency towns25.

The Existing Legal Framework

In India the Individual bankruptcy and insolvency is legislated under two acts:
 The Presidency Towns Insolvency Act, 1909
o The Presidency Towns Insolvency Act, 1909, covers the insolvency of
individuals and of partnerships and associations of individuals in the
three erstwhile Presidency towns of Chennai, Kolkata and Mumbai. The
1861 Indian High Courts Act led to the setting up of the High Court
system in place of the Presidency towns Supreme Courts, which also has
jurisdiction over insolvency related matters in the Presidency towns.
 The Provincial Insolvency Act 1920
o It is the insolvency law for individuals in areas other than the Presidency
towns, deals with insolvency of individuals, including individuals as
proprietors. Section 3(1) of the Provincial Insolvency Act, 1920, allows
the State Government to empower subordinate courts to hear insolvency
petitions, with district courts acting as the court of appeal.

25
Presidency Towns of Calcutta, Madras and Bombay, Presidency-Towns Insolvency Act, 1909 is
applicable.

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Partnership firms are registered under the Indian Partnerships Act, 1932, which is
administered by the Ministry of Corporate Affairs. But, like for sole proprietorships,
insolvency and bankruptcy resolution of partnership firms is treated the same as under
individual insolvency and bankruptcy law. The present bankruptcy and insolvency
framework is knit together from debt recovery laws as well as collective action laws to
resolve insolvency and bankruptcy26. Insolvency and bankruptcy regulation, especially
for individuals, is likely to be a resource intensive function27.

Civil Remedies
A civil court of relevant jurisdiction is the basic mechanism that is available to any
creditor for debt recovery28. If the loan is backed by security, this is enforced as a
contract under the law. Code of Civil Procedure 1908 provides for the procedure. We
have already discussed the Legal Framework of DRT29 and SARFAESI30 in Unit 4 of
Module 1.

Other than the aforesaid modes of recovery including the voluntary restructuring
mechanisms (CDR / SDR /S4A), creditors may also use the alternate modes of recovery
by using the arbitration clause or conciliation under the Arbitration and Conciliation
Act, 1996. Mediation may also be used as an amicable settlement, so also the Lok
Adalats31. As noted above, RBI has also made Guidelines32 on recovery practices for
banks, NBFCs and NBFCs-MFIs.

26
Ravi, Aparna (2015), The Indian Insolvency Regime in Practice – An Analysis of Insolvency and Debt
Recovery Proceedings, Working Paper, FRG IGIDR
27
Para 4.1.13 BLRC Report
28
Historically, in India the remedy available to lenders has been to file an ordinary money suit for
recovery against the defaulting borrower for the outstanding amounts or to file a summary suit as
provided for under Order 37 of Code of Civil Procedure 1908. Both these options have been time
consuming. Another option available to the lender was to apply for foreclosure of mortgage, where
borrower or guarantor had provided security by way of mortgage, in respect of outstanding towards the
lender. Foreclosure and money suits have proved to be a long drawn battle in the court, consuming
several years in litigation, owing to the delay on account of various reasons. The Indian courts, lower
courts as well as high courts, were saddled with cases filed by the domestic banks, foreign banks and
financial institutions. The delay in the disposal of such cases was deplorable.
29
The Recovery of Debt Due to Banks and Financial Institutions Act (RDDBFI Act) 1993 gives banks
and a specified set of financial institutions greater powers to recover collateral at default. The law
provides for the establishment of special Debt Recovery Tribunals (DRTs) to enforce debt recovery by
these institutions only. The law also provides for the Debt Recovery Appellate Tribunals (DRATs) as the
appellate forum.
30
Quasi-Civil Remedy: Under certain specified conditions, the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act (SARFAESI) 2002 enables secured creditors to
take possession of collateral without requiring the involvement of a court or tribunal. This law provides
for actions by secured creditors to take precedence over a reference by a debtor to BIFR. The DRT is the
forum for appeals against such recovery.
31
The Lok Adalat is an effective mechanism for the settlement of banks dues. The Legal Service
Authority Act, 1987 gives a Lok Adalat a legal structure, conferring on it the power of the civil court,

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Criminal Remedy
Banks and Financial Institutions lend money to the borrowers, it may secured or
unsecured, but in both the cases borrowers is liable to pay the same in the form of
equated monthly installments (EMIs) for which borrower is required to give post dated
cheque for each installment equal to the tenure of the loan33. To ensure promptitude and
remedy against defaulters and to ensure credibility of the holders of the negotiable
instrument a criminal remedy of penalty was inserted in Negotiable Instruments Act,
1881 in form of the Banking, Public Financial Institutions and Negotiable Instruments
Laws (Amendment) Act, 1988, which were further, modified by the Negotiable
Instruments (Amendment and Miscellaneous Provisions) Act, 200234. Chapter XVII of
the Negotiable Instrument Act, 1881 specifically deals with the penalties in case of
dishonour of certain cheques for insufficiency of funds in the accounts. Section 138 of
the NI Act provides for the criminal remedy in case of dishonor of cheques etc.

Focus on Individuals and Partnership35 under the IBC 2016

BLRC notes that “The focus of bankruptcy reform so far has been legal entities, i.e.
firms registered under the Companies Act, 1956 (and 2013), as well as the Limited
Liability Partnership Act, 2008. However, large parts of the credit market consists of
loans to individuals, and loans to small and medium enterprises (SMEs) which are in the
form of sole proprietorships. These enterprises are a large and important component of
the Indian economy. According to reports by the SMB Chamber of Commerce and the
Ministry of Micro, Small and Medium Enterprises, India currently has more than 48
million SMEs. These SMEs contribute more than 45% of India’s industrial output, 40%

thereby formalizing the structure. For e.g. On January 6, 2010 the Tamil Nadu State Legal Service
Authority conducted an exclusive mega Lok Adalat for the Central Bank of India and helped the bank to
dispose of 226 cases and recover a whopping Rs 11.2 crore on a single day. A total of 1,430 cases had
originally been listed for hearing.
32
A reference is invited to (a) Circular DBOD.Leg.No.BC.104/ 09.07.007 /2002-03 dated May 5, 2003
regarding Guidelines on Fair Practices Code for Lenders (b) Circular DBOD. No. BP. 40/ 21.04.158/
2006-07 dated November 3, 2006 regarding outsourcing of financial services and (c) Master Circular
DBOD.FSD.BC.17/ 24.01.011/2007-08 dated July 2, 2007 on Credit Card Operations.
33
https://www.legalindia.com/recovery-of-dues-by-banks/
34
Before 1988 there being no effective legal provision to restrain people from issuing cheques without
having sufficient funds in their account or any stringent provision to punish them in the vent of such
cheque not being honoured by their bankers and returned unpaid. Of course on dishonour of cheques there
is a civil liability accrued. However in reality the processes to seek civil justice becomes notoriously
dilatory and recover by way of a civil suit takes an inordinately long time.
35
Chapter 6 of BLRC Report

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of the country’s total exports and create 1.3 million jobs every year. Indian SMEs
employ close to 40% of India’s workforce.”

India has a weak record on recovery of loans to individuals and to SMEs. Either
recovery is difficult and leads to creditors incurring losses, or recovery takes place
through the use of coercive practices which leads to debtors incurring losses. Given the
importance of such borrowers in the economy, the Committee believes that a fresh
approach to individual bankruptcy is an important goal. The goals of the process for
individual insolvency and bankruptcy presented in the Code include:
 Providing a fair and orderly process for dealing with the financial affairs of
insolvent individuals.
 Providing effective relief or release from the financial liabilities and
obligations of the insolvent.
 Providing mechanisms that enable both debtor and creditor to participate with
the least possible delay and expense.
 Providing the correct ex-ante incentives so that individuals are not able to
unfairly strategise during the process of bankruptcy.

These goals overlap considerably with goals of the resolution for legal entities. There
are two differences:
 First, in the bankruptcy process, where unlike a legal entity, the individual
cannot be liquidated.
 Second, the Code provides for debt relief for a certain section of debtors where
the chances of recovery are so low that the cost of resolving the insolvency
would only become an additional burden to either the debtor or the creditor or
the State.

IBC: A Unified Code

The BLRC recommended for a single Code to resolve insolvency for all companies,
limited liability partnerships, partnership firms and individuals. In order to ensure legal
clarity, the Committee recommended that provisions in all existing law that deals with
insolvency of registered entities be removed and replaced by this Code.

This has two distinct advantages in improving the insolvency and bankruptcy
framework in India. The first is that all the provisions in one Code will allow for higher
legal clarity when there arises any question of insolvency or bankruptcy. The second is
that a common insolvency and bankruptcy framework for individual and enterprise will

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enable more coherent policies when the two interact. For example, it is common
practice that Indian banks take a personal guarantee from the firm’s promoter when they
enter into a loan with the firm. At present, there are a separate set of provisions that
guide recovery on the loan to the firm and on the personal guarantee to the promoter.
Under a common Code, the resolution can be synchronous, less costly and help more
efficient recovery.

Jurisdiction on Individual Insolvency and Bankruptcy: Vesting the powers of Debt

Recovery Tribunals (DRT): In IBC the Adjudicating Authority, in relation to
insolvency resolution and bankruptcy for individuals and partnership firms is DRT
constituted under sub-section (1) of section 3 of the Recovery of Debts Due to Banks
and Financial Institutions Act, 1993 (RDDBFI Act )36

BLRC Logic: Current Indian laws on individual insolvency are archaic and do not treat
individual insolvency at par with corporate insolvency in this regard. As noted above,
jurisdiction over these matters are vested with High Courts (for Calcutta, Madras and
Bombay) or District Courts (for the rest of India). In the IBC, the goals of bankruptcy
laws for individuals overlap considerably with the goals of corporate insolvency and
liquidation. Therefore, there are economies of scale in having the same judicial
institution adjudicating the resolution process for firms and individuals. However,
unlike firm insolvency and liquidation, the physical infrastructure of the adjudication
institutions for individual insolvency need to be much more wide spread across the
entire country to facilitate access to justice for the common Indian. Currently, NCLT is
a work in progress and it may take some time for NCLT benches to have a wide scale
presence at national level. In contrast, at present Debt Recovery Tribunal (DRT)
benches have much wider presence across the country. Therefore, the Committee
recommends that DRT should be vested with the jurisdiction over individual insolvency
and bankruptcy matters.

It may be noted that the RDDBFI Act has been further amended in view of IBC 2016 to
make it the Recovery of Debts and Bankruptcy Act, 1993 (RDBA) by virtue of
Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous
Provisions (Amendment) Act, 2016 w.e.f. 1.09.2016. The Amendment provides for
establishment of such number of Debts Recovery Tribunals and its benches as it may
consider necessary to exercise the jurisdiction, powers and authority of the Adjudicating
Authority conferred on such Tribunal by or under the Part III of IBC37. Further, it is

36
Section 79 of IBC 2016
37
Section 3(1A) read with Section 17(1A) of Recovery of Debts and Bankruptcy Act, 1993

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contemplated that the Tribunal shall have circuit sittings in all district headquarters38.
Similarly, there is a provision for Appellate Tribunals (DRAT). We would discuss
about the Adjudicating Authorities in Module 2 Unit 2 in further detail.

Bankruptcy in MSME Sector

MSME Sector largely comprises of partnership and proprietorship firms whose
promoters have unlimited liability. Though the loans are smaller in value, SME
borrowers far outnumber companies, resulting in their borrowings exerting a significant
influence in the financial sector’s stability. The IBC that is currently in place deals only
with companies, not other forms of organized economic activity39 . This calls for a
special regime for the small entrepreneurs who take the risk of doing business and
create jobs without any protection for their personal assets — just a house, in many
cases. A committee is already examining this aspect to propose simpler provisions
covering personal bankruptcy of individuals with business interests40.

According to data compiled by the ministry of micro, small and medium enterprises, the
sector accounts for 33% of India’s manufacturing output. There are as many as 36
million such enterprises in the country, half of them in rural areas, employing more than
80 million people

38
Section 17(1A) of Recovery of Debts and Bankruptcy Act, 1993
39
http://www.livemint.com/Home-Page/58Kg0UxEOnnzCodHj87sHM/Govt-working-on-a-simpler-
insolvency-bankruptcy-code-for-SME.html
40
Id.

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The aforesaid provisions would be different than the Fast Track Insolvency41 which is
meant for a particular set of specified categories of debtors (Corporate Insolvency). The
Ministry of Corporate Affairs (MCA) has notified the relevant Sections 55 to 58 of the
Insolvency and Bankruptcy code, 2016 pertaining to the Fast Track Process and also
notified that fast track process shall apply to the following categories of corporate
debtors:
 a small company, as defined under clause (85) of section II of the Companies
Act, 2013; or
 a startup (other than the partnership firm), as defined in the notification dated
23rd May, 2017 of the Ministry of Commerce and Industry42; or
 an unlisted company with total assets, as reported in the financial statement of
the immediately preceding financial year, not exceeding Rs.1 crore.

The Concept of Consumer Bankruptcy

Consumer lending has surged in countries across the globe in recent years43. In recent
years, modern consumer financial markets have emerged or have begun emerging in
nearly all middle-income and many lower-income countries as these countries have
experienced significant per capita growth in recent years44. Total financial liabilities of
households in India, for example, have increased nearly six-fold between 2000 and
2006. In his research on Consumer Bankruptcy, Mr. Adam Feibelman concludes as
follows:
Existing scholarship on law, finance, and development generally ignores the
role that consumer finance and the regulation thereof might play in promoting
economic development. In fact, there are good reasons to believe that deepening
of consumer finance promotes growth and/or development in emerging
economies. Regulation of consumer lending may support these effects by helping
to expand the availability of consumer finance and by addressing the potential
costs of over-indebtedness. Consumer bankruptcy law that includes meaningful
debt relief has the potential to be an effective form of such regulation. It can
help promote deepening of consumer financial markets by increasing the

41
Sections 55-58 of IBC 2016 read with IBBI (Fast Track Insolvency Resolution Process for Corporate
Persons) Regulations, 2017
42
http://www.egazette.nic.in/WriteReadData/2017/176201.pdf
43
Feibelman, Adam (2009) "Consumer Bankruptcy as Development Policy," Seton Hall Law Review:
Vol. 39: Iss. 1, Article 3.
44
According to the World Bank, gross domestic product per capita nearly doubled in Brazil in the period
between 1986 and 2006, increasing from $4854 to $9054; in India, GDP per capita nearly quadrupled,
increasing from $993 to $3827; and in China, that figure rose seven-fold in that period, increasing from
$918 to $7660. See World Bank, World Development Indicators, at http://data.un.org/Data.aspx?d
=CDB&f=srID%3a29922

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 Three Months Certificate Course (Online) in
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expected insolvency returns of creditors, by making such returns more

predictable, and by encouraging risk-averse consumers to obtain finance. It can
also limit the amount and the costs of consumer over-indebtedness. Thus,
consumer bankruptcy law should be understood as a potentially key component
of development policy, and not only in the wake of widespread over-
indebtedness or financial crisis. Unless it appears that a society cannot
effectively administer such a regime or that social or cultural factors would keep
consumers from utilizing it, emerging economies should consider adopting a
consumer bankruptcy system or modernizing their existing regimes.

In America households can choose between two bankruptcy procedures45:

 Chapter 7 and
 Chapter 13.

Under Chapter 7, all unsecured debt is discharged in exchange for non-collateralized

assets above an exemption level. However, debtors are not obliged to use any of their
future income to repay debts. Debtors who file under Chapter 7 are not permitted to
refile under Chapter 7 for six years, although they may file under Chapter 13. A typical
chapter 7 bankruptcy takes about 4 months from start to completion46. This is equivalent
to Individual Bankruptcy in Part II of IBC 2016.

Chapter 13 permits debtors to keep their assets in exchange for a promise to repay part
of their debt over the next 3 to 5 years. The debtors plan must repay unsecured creditors
at least as much as they would have received under a Chapter 7 filing. The plan must be
confirmed by the bankruptcy judge, but creditors cannot block the plan. In order to
qualify for Chapter 13, individuals must have a regular income and their debts must be
within prescribed limits (secured debts must be less than $807,000 and unsecured debt
must be less than $270,000)47. Chapter 13 is basically a Fresh Start48. IBC 2016 also
provides for fresh start which is new to the bankruptcy laws in India and would be
discussed in detail in Unit 1 of Module V.
45
https://www.minneapolisfed.org/research/wp/wp617.pdf
46
Approximately 70 percent of consumer bankruptcies are filed under Chapter 7. Filers must pay the
bankruptcy court filing fee and the cost of legal advice. The current cost of filing is $200. Sullivan,
Warren, and Westbrook (2000) report that legal fees typically range from $750 to $1,500. In addition, a
debtor filing for bankruptcy has to submit a detailed list of all creditors, amounts owed, source, amount,
and frequency of income, all assets and monthly living expenses.
47
Igor Livshits, James MacGee, and Michele Tertilt, Consumer Bankruptcy: A Fresh Start, Working
Paper 617 Revised January 2003
48
A key argument that has been advanced in favour of the “fresh start” provisions is that providing
debtors with a fresh start provides incentives for consumers to work hard. This argument in favour of the
“fresh start” doctrine is succinctly summarized in a U.S. Supreme Court Ruling in 1934: “One of the
primary purposes [...] is to relieve the honest debtor from the weight of oppressive indebtedness, and to
permit him to start afresh [...]. From the viewpoint of the wage earner, there is little difference between
not earning at all and earning wholly for a creditor [...] The new opportunity in life and the clear field for
future effort [...]” In other words, one of the objectives of bankruptcy is to create the proper incentives for
consumers with large debts to work.

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Chapter 11 in US provides for Corporate Insolvency Regime49

Bankruptcy in Financial Sector including Microfinance sector (MFIs)

It may be noted that the bankruptcy in Financial Sector has not been taken care of under
the IBC as the same would be taken care of by the FSLRC recommendations 50 .
Government is proposing a separate bankruptcy law to deal with insolvency in financial
sector companies that include banks and non-banking financial companies (NBFCs)51.
Finance Minister Shri. Arun Jaitley in his 2016-17 budget speech had said:
“A systemic vacuum exists with regard to bankruptcy situations in financial
firms. This code will provide a specialised resolution mechanism to deal with
bankruptcy situations in banks, insurance firms and financial sector entities...
This code, together with the Insolvency and Bankruptcy Code 2015, when
enacted, will provide a comprehensive resolution mechanism for our economy,”

Live Mint: September 21, 2017

“Financial firms by their nature and characteristics have depositor money as well. So, an
appropriate resolution processes for orderly winding down of financial firms is not an
easy process.” FSLRC had suggested a “resolution corporation” to expeditiously deal
with issues concerning insolvency of financial institutions, including banks and
insurers. The draft code on resolution of financial firms also proposed to consolidate the
existing laws relating to resolution of certain categories of financial institutions,
including banks, insurance companies, financial market infrastructures, payment
systems and other financial service providers into a single legislation, and to provide for
additional tools of resolution to enable the resolution corporation to maintain the
systemic stability in the country. The proposed resolution corporation will contribute to
the stability and resilience of the financial system by carrying out speedy and efficient
resolution of financial firms in distress, providing deposit insurance to consumers of
certain categories of financial services and monitoring the systemically important
financial institutions. It will also protect consumers of financial institutions and public
funds to the extent possible. After enactment of the Financial Resolution and Deposit
Insurance Bill 2016, the Deposit Insurance and Credit Guarantee Corporation will be
dissolved and all its functions will be carried out by the resolution corporation.

49
However, the major difference with IBC 2016 is that in most instances the debtor remains in control of
its business operations as a “debtor in possession” and is subject to the oversight and jurisdiction of the
court.
50
The only element which is not covered in the present work is the recent work of the Financial Sector
Legislative Reforms Commission (FSLRC), which has a comprehensive solution for the failure of
financial firms: BLRC Report
51
http://www.livemint.com/Politics/gNjoEMQH8Kx8CvI0QyW6YO/Govt-to-table-bankruptcy-law-for-
NBFCs-MFIs-in-monsoon-sess.html

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Role of State Governments

“Money-lending and money-lenders; relief of agricultural indebtedness” is the entry
under State List52 of the Constitution of India which empowers the State Governments
to legislate and accordingly, we see different State Governments coming with farm loan
waivers in the recent times and also the money lending laws. Other than the aforesaid
State Governments may have legislated special legislation dealing with situations of
bankruptcy/insolvency, for e.g. Maharashtra Relief Undertakings (Special Provisions
Act), 195853. The Statement of Objects and Reasons for the aforesaid Act reads:
“In order to mitigate the hardship that may be caused to the workers who may be
thrown out of employment by the closure of an undertaking, Government may
take over such undertaking either on lease or on such conditions as may be
deemed suitable and run it as a measure of unemployment relief. In such cases
Government may have to fix revised terms of employment of the workers or to
make other changes which may not be in consonance with the existing labour
laws or any agreements or awards applicable to the undertaking. It may become
necessary even to exempt the undertaking from certain legal provisions. For
these reasons it is proposed to obtain power to exclude an undertaking, run by or
under the authority of Government as a measure of unemployment relief, from
the operation of certain labour laws or any specified provisions thereof subject
to such conditions and for such periods as may be specified. It is also proposed
to make a provision to secure that while the rights and liabilities of the original
employer and workmen may remain suspended during the period the
undertaking is run by Government, they would revive and become enforceable
as soon as the undertaking ceases to be under the control of Government.”

However, in view of the IBC 2016, Hon’ble Supreme Court in Innoventive Industries
has held that “the earlier State law is repugnant to the later Parliamentary
enactment….”54

The Individual Creditor: Jaypee’s Case

While there are issues relating to Individual Debtor which has been tackled under
Part III of IBC, recently in the matters relating to corporate insolvency resolution of real
estate companies, question arose as to the status of the individual consumers who have

52
Entry 30
53
referable to Entry 23, List III in the 7th Schedule to the Constitution, which reads as under, “23. Social
security and social insurance; employment and unemployment.”
54
M/s Innoventive Industries Ltd. vs. ICICI Bank & Anr, Civil Appeal Nos. 8337-8338 of 2017 decided
on August 31, 2017 [Coram R.F. Nariman and Sanjay Kishan Kaul, JJ).

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booked flats by paying advance etc. This necessitated for an amendment in the CIRP
Regulations55.

Press Release IBBI: August 16, 2017

Provision of a Form for Submission of Claims by Creditors other than Financial

Creditors and Operational Creditors of the Corporate Debtor under Corporate
Insolvency Resolution Process. Section 18 (1) of the Insolvency and Bankruptcy Code,
2016 (Code), inter alia, provides that an interim resolution professional shall “collect all
information relating to the assets, finances and operations of the corporate debtor for
determining the financial position of the corporate debtor …” and “receive and collate
all the claims submitted by creditors to him, pursuant to the public announcement made
under sections 13 and 15”. These provisions envisage submission and collation of all
claims from all creditors. All creditors, including operational creditors and financial
creditors, need to submit claims to the interim resolution professional.

2. The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for
Corporate Persons) Regulations, 2016, and the Insolvency and Bankruptcy Board of
India (Fast Track Insolvency Resolution Process for Corporate Persons) Regulations,
2017 provide for Forms for submission of claims by operational creditors (including
workmen and employees), and financial creditors. There could be claims from a
creditor who is not a financial creditor or an operational creditor and it needs a specific
form for submitting its claim. The Insolvency and Bankruptcy Board of India has
amended these regulations today to provide for a form (Form F) for submission claims
by creditors other than financial and operational creditors.

It may be noted that Hon’ble Supreme Court has taken cognizance of the plight of
individual consumers and the jurisprudence on insolvency and bankruptcy laws in India
is going to see a lot of action in coming days. We would cover some of these aspects
under the last unit of this course i.e. Emerging Issues and Developments in law and
practice of IBC (Module V: Unit 5).

55
See No. IBBI/2017-18/GN/REG013 Amendment Regulation 2017 dated 16th August 2017

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