The government is planning to amend the Insolvency and Bankruptcy Code (IBC) to facilitate “out-of-court” waiver of debt up to Rs 35,000 through mediation to save millions of poor, including small farmers, from the rigours of insolvency process. Mediation, however, will be conducted within the IBC framework for individual insolvency norms, acc. to sources.
The regulator (Insolvency and Bankruptcy Board of India) and the government are also considering allowing a separate set of low-cost resolution professionals for individual insolvency cases by relaxing the eligibility criteria. “While resolution professionals handling corporate insolvency cases worth thousands of crores will still be allowed to participate in individual insolvency cases as well, given the limited scope for good remuneration and tiny size of most of these loans (minimum default amount to trigger such proceedings will be just Rs 1,000), they may not be interested,” one of the sources explained.
Currently, current accountants, company secretaries, cost accountants and lawyers can become insolvency professionals if they fulfil the criteria and clear an examination conducted by the IBBI.
As reported earlier, once the regulations are in place, the poor who don’t own houses, earn up to Rs 60,000 a year each and have assets up to Rs 20,000 will be eligible to apply for such a debt relief. As per the initial plan, all such applications are to be approved by the adjudicating authority (the debt recovery tribunal).
As per the initial proposals, the individual insolvency framework may recognise roughly two broad categories of debtors — the poor (who meet the stipulated criteria of income, asset and debt size); and those who have offered personal guarantee to stressed companies, proprietary/partnership firms (not registered under the Companies Act) and everybody else who is not covered under the first category.
A section of the government believes relief under individual insolvency will be more effective than populist moves like farm loan waivers that involve relief from just bank debt and is mostly exploited by rich farmers; it will also deal a deadly blow to village money lenders who charge exorbitantly high interest rates (30-40% a year in many cases) from the poor and often force them into a debt trap (many farmers have committed suicides due to this).
As sources had reported earlier, unlike in corporate insolvency, the adjudicator in individual insolvency cases will be the DRT, and not the National Company Law Tribunal (NCLT); similarly, insolvency resolution plans involving the second category of debtors (personal guarantors to stressed firms, proprietary/partnership firms etc) will have to be approved by 75% of lenders, instead of 66%. The minimum default amount to trigger individual insolvency is set at just Rs 1,000 (In case of corporate insolvency, it’s `1 lakh). Bankruptcy proceedings will be allowed only for the second category of debtors, if the resolution plan fails.
The poor will have the option to get rid of their debt under the so-called “fresh start process”. Under this, only the debtors can apply for the discharge of their debt. A resolution professional will examine the application of the debtor and could submit a report with the DRT for the discharge of the debtor, enabling the borrower to start afresh.
However, since any such relief will be part of their credit history, potentially discouraging lenders to lend them again, these small debtors will also have the flexibility to opt out of the insolvency process and settle with lenders on their own.
They have to be “fit and proper” and they must not be undischarged insolvent, among others.
The sources said various changes that are being planned will be introduced in phases. “Individual insolvency norms relating to those who have offered personal guarantee to stressed firms, proprietary/partnership firms (not registered under the Companies Act) will be notified first. Then the IBC will be amended to introduce the mediation concept in individual insolvency, which will come after some time,” said one of the sources.
Source: Financial Express, July 21, 2019