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The provisions concerning the insolvency and bankruptcy of personal guarantors, including individuals and partnership firms, were officially announced on November 15, 2019, and became effective on December 1, 2019. Consequently, the insolvency proceedings of an individual guarantor of a corporate debtor will be governed by the Insolvency and Bankruptcy Code, 2016 (IBC). However, if the individuals in question are not personal guarantors, their insolvency proceedings will be conducted in accordance with the Presidency Towns Insolvency Act, 1909, and the Provincial Insolvency Act, 1920.

Part III of the Insolvency Code, 2016 specifically addresses the resolution of insolvency and liquidation for individuals and firms. The Debt Recovery Tribunal (DRT) will serve as the adjudicating authority, while the Debt Recovery Appellate Tribunal (DRAT) will act as the appellate authority for individuals and firms. These provisions are set to replace the existing Presidency Towns Insolvency Act, 1909, and Provincial Insolvency Act, 1920.

For individuals and firms, there are two distinct processes – fresh start and insolvency resolution. These are followed by bankruptcy order.

FRESH START

The concept of a "fresh start" will be applicable to individuals with a monthly income of less than Rs. 5,000 and a debt amount not exceeding Rs. 35,000. In such cases, the process of insolvency resolution will primarily be managed by an "insolvency professional.

Section 80 of IBC

A debtor who is unable to repay their debt and meets the conditions outlined in subsection (2) has the right to submit an application for a fresh start, seeking a discharge of their qualifying debt.

The debtor, personally or through a resolution professional, can apply for a fresh start to the Adjudicating Authority if the following conditions are met:

(a) The debtor's gross annual income is not more than sixty thousand rupees.

(b) The total value of the debtor's assets does not exceed twenty thousand rupees.

(c) The total value of the qualifying debts does not exceed thirty-five thousand rupees.

(d) The debtor is not currently an undischarged bankrupt.

(e) The debtor does not possess a residential property, regardless of whether it is subject to any liabilities or not.

(f) There are no ongoing fresh start, insolvency resolution, or bankruptcy processes against the debtor.

(g) The debtor has not received a fresh start order under this particular Chapter within the previous twelve months from the date of the fresh start application.

INSOLVENCY RESOLUTION

Part III of the Code contains provisions that deal with the resolution of insolvency and bankruptcy cases involving individuals and partnership firms. To facilitate this process, individuals are categorized into three distinct groups:

(i) Personal guarantors (personal guarantor as an individual who acts as a surety in a contract of guarantee to a corporate debtor.) to corporate debtors (CDs),

(ii) Partnership firms and proprietorship firms, and

(iii) Other individuals.

This categorization allows for the phased implementation of individual insolvency, taking into account the broader implications of these provisions.

PROCESS:

The process of filing an application for the insolvency of personal guarantors involves several steps and requirements. Here is a paraphrased explanation of each step:

Application Filing: An application for the insolvency resolution process can be submitted to the Adjudicating Authority (AA) when there is a default of at least Rs. 1000.

Application Options: The personal guarantor (PG) has the choice to file the application personally or through a Resolution Professional (RP) using Form A of the Insolvency and Insolvency Resolution Process (IIRP) Rules. This applies to defaults on debt, excluding any specifically excluded debts.

Creditor Notice: If a creditor intends to file an application, they must issue a notice to the PG using Form B of the IIRP Rules, requesting payment. Only if the PG fails to make the payment within 14 days of receiving the notice can the creditor initiate insolvency proceedings against the PG.

Creditor Application: A creditor can file an application individually, jointly with other creditors, or through an RP using Form C of the IIRP Rules. This applies to defaults on debt, excluding any specifically excluded debts.

Application Fee: The application must be accompanied by a fee of Rs. 2000, as per Rule 6(1) or 7(2) of the IIRP Rules.

Issuance of Public Notice and Creditor Claims: The AA issues a public notice within seven days of admitting the application, inviting claims from the creditors of the PG. Creditors have 21 days from the notice to register their claims with the RP, providing proof of the debt. The registration can be done electronically or through courier, speed post, or registered letter. The costs associated with submitting the claim are borne by the creditors.

Preparation of List of Creditors: The RP verifies each claim as it is received and prepares a list of creditors based on the information provided in the application and the claims received within 30 days from the date of the public notice.

Repayment Plan: The PG, in consultation with the RP, prepares a Repayment Plan containing proposals for debt restructuring or resolution, implementation schedules, and the source of funds. The plan may include the sale or transfer of assets, modification of security interests, reduction in amount payable to creditors, and modification of repayment terms. The plan should also cover the PG's reasonable expenses and the needs of dependent family members. The RP submits the repayment plan and a report on it to the AA within 21 days from the last date of claim submission.

Approval or Rejection of the Repayment Plan: The RP prepares a report on the meeting of creditors regarding the repayment plan and provides copies to the PG, creditors, and the AA. Based on the report, the AA approves or rejects the repayment plan and may provide directions for its implementation. If modification is required, the AA can direct the RP to reconvene the meeting of creditors for reconsideration.

Effect of Approval/Non-Approval of the Repayment Plan: Upon approval, the repayment plan becomes binding on the creditors and the PG. If the repayment plan is rejected, the debtor and creditors can file an application for bankruptcy. The RP oversees the implementation of the repayment plan and can seek directions from the AA if necessary.

Completion of Repayment Plan: Within 14 days of completion of repayment plan, the RP shall inform the AA and the persons who are bound by the repayment plan that it has been fully implemented. The RP shall also share the report summarising all receipts and payments made in pursuance of the plan.

Discharge Order: The RP shall apply to the AA for a discharge order in relation to the debts mentioned in the repayment plan and the AA may pass such discharge order. The repayment plan may provide for an early discharge or discharge on complete implementation of the repayment plan. The discharge order shall be forwarded to the IBBI, for the purpose of recording entries in the register.