Understanding Personal Bankruptcy Laws in India

Introduction

In India, individuals facing overwhelming financial difficulties have recourse to personal bankruptcy laws. Bankruptcy, often viewed as a last resort, offers a fresh start to those grappling with unmanageable debts. This article examines the essential aspects of personal bankruptcy in India, including the legal framework, procedures, and recent updates.

Legal Framework

India’s legal landscape concerning personal insolvency comprises two primary statutes:

1. The Presidency Towns Insolvency Act, 1909: Applicable to the former presidency towns of Bombay, Calcutta, and Madras.
2. The Provincial Insolvency Act, 1920: Extending to the remainder of India.

Under these laws, district courts hold jurisdiction over insolvency cases. Upon an individual’s declaration of insolvency, all personal assets come under the purview of the Official Assignee, appointed by the Indian government, who then liquidates these assets for distribution among creditors.

Initiating Insolvency Proceedings

Two principal routes exist for commencing insolvency proceedings under the Insolvency and Bankruptcy Code (IBC):

1. Bankruptcy Route: Involving a multifaceted process overseen by the Debt Recovery Tribunal (DRT), wherein either the debtor or a creditor can file an application. The DRT appoints a Resolution Professional (RP) to evaluate the debtor’s financial situation and propose a resolution plan.
2. Fresh Start Route: A streamlined option accessible to individuals with debts below a specified threshold (yet to be defined). Here, the debtor directly applies to the Insolvency and Bankruptcy Board (IBBI). If approved, a moratorium is enacted on debt collection, affording the debtor time to negotiate a repayment plan.

Key Considerations

• Debt Threshold: While the bankruptcy route has no minimum debt prerequisite, a threshold is anticipated for the fresh start route.
• Process Duration: Bankruptcy proceedings can be time-consuming, whereas the fresh start route aims for expediency.
• Impact on Debtor: Debtors may encounter limitations on asset sales or incurring new debt during proceedings.
• Debt Discharge: Successful resolution plans may result in the forgiveness of outstanding debts.

Personal Bankruptcy vs. Insolvency

Though interconnected, bankruptcy and insolvency bear distinctions:

• Insolvency: Initiated by a creditor and managed by an Insolvency Resolution Professional (IRP), entailing asset liquidation.
• Bankruptcy: Voluntarily declared by the individual, overseen by the court, with the objective of facilitating a fresh start.

Challenges

• Societal Stigma: Bankruptcy carries a negative connotation, prompting individuals to shy away due to social ramifications.
• Credibility Concerns: Insolvents may struggle to rebuild trust for future transactions or borrowing.

Recent Developments

The Insolvency and Bankruptcy Code, 2016 (IBC), has streamlined bankruptcy procedures in India. It encompasses provisions for insolvency, bankruptcy, and a fresh start regime, emphasizing creditor rights and efficient debt recovery.

Latest Judgment

In the case of RPS Infrastructure Ltd. v. Mukul Kumar, the court clarified that pending approval of a resolution plan by the adjudicating authority does not imply that the successful resolution applicant will indefinitely contend with unresolved claims. This underscores the importance of addressing outstanding claims during the insolvency resolution process.

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