Insolvency resolution framework for individuals set to be issued shortly

As the Insolvency and Bankruptcy Board of India (IBBI) has already finalised the norms for individual bankruptcy resolution in case of personal guarantors, the government is expected to notify these within a month, sources familiar with the matter said.

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The IBC requires that resolution should be done within 180 days and a grace period of 90-days could be accorded, bringing the maximum time to 270 days.

The government is soon expected to put in place a framework for insolvency resolution in case of personal guarantors to corporate debtors, and take up the issue of debt resolution in case of proprietorship and partnerships in the second phase.

As the Insolvency and Bankruptcy Board of India (IBBI) has already finalised the norms for individual bankruptcy resolution in case of personal guarantors, the government is expected to notify these within a month, sources familiar with the matter said. Under the Insolvency and Bankruptcy Code (IBC), a corporate debtor or a financial creditor can take listed and unlisted companies to the National Company Law Tribunal (NCLT) for initiating a time-bound corporate insolvency resolution process (CIRP).

However, no such framework is currently available in the case of personal guarantors to companies, partnership firms and individuals.

“Under the new framework, individuals have been divided into three categories: personal guarantors, proprietors and the third is common individuals. The government is ready with norms for personal guarantors for corporate debtors and expects these to be notified soon,” sources said, adding that the Ministry of Corporate Affairs is in final stages of approving the framework.

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Insolvency system yet to bring common individuals in its fold

While the insolvency resolution mechanism for companies has been a gamechanger, not only in terms of direct resolution of cases and debt recovery for banks but by also forcing promoters to repay their loans to prevent losing control of their company, the move to bring individuals under insolvency resolution will be logical second step in checking an individual’s debt behaviour. While the first step is to get HNIs and promoters of companies, with deeper pockets, within its fold, the mechanism to bring common individuals needs much more thought process as it may impact livelihood of millions.

When contacted by The Indian Express, IBBI Chairperson M S Sahoo said: “We are working on rules and regulations for insolvency resolution and bankruptcy of personal guarantors to corporate debtors. Learning from the experience, we would draft rules and regulations for insolvency resolution and bankruptcy of proprietorship and partnership firms. Thereafter, we will work on a framework for other individuals.”

In each category of individual debtors, there are mainly two approaches — one is insolvency resolution and other is the bankruptcy process. The source said that the government may start individual insolvency resolution initially and launch the bankruptcy process later for such debtors. Within the individual category, while it is easy to start the process for guarantors to corporate debtors and firms, in the case of individuals, the same approach cannot be applied since each case is unique.

“Guarantors and firms have some shock absorption capacity and can go through the insolvency and bankruptcy process. But for individuals, it is different because individuals’ sensitivity needs to be taken care of. The government cannot have one standard for over one billion people. So the workout has to be very sensitive. Also, it would require a certain floor amount below which debts will have to be waived,” sources said. The framework will require a mediation mechanism, for which the IBC law will have to be amended.

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The IBC requires that resolution should be done within 180 days and a grace period of 90-days could be accorded, bringing the maximum time to 270 days.

This was inserted to bring in urgency in the process of resolving Rs 11 lakh crore-worth of stressed loans.

At the end of December last year, for the cases which underwent successful resolution under the IBC, the financial creditors could recover a total of Rs 65,753.23 crore out of their total claims of Rs 1,35,859 crore — resulting in a recovery rate of 48.39 per cent under the IBC at December-end, much higher than what banks were recovering through normal channels such as Debt Recovery Tribunals.

With the start of resolution in case of guarantors, both the number and the amount involved for resolution under the IBC will go up significantly.