26 July 2017 14:09:45 IST

What the bankruptcy code could mean to you

In addition to empowering corporate creditors, the law helps individuals get financially stable too

In a recent landmark ruling, the Gujarat High Court rejected Essar Steel’s plea and cleared the way for banks to initiate insolvency proceedings against the company. The court’s ruling has helped maintain the sanctity of the new bankruptcy code and has given lenders stronger teeth to recover money from corporate defaulters.

Contrary to the common notion that the Insolvency and Bankruptcy Code (IBC) only applies to corporate borrowers, the law also has implications for you and me as individual borrowers and lenders.

If you, as a borrower, are stuck in a vicious cycle of debt and want to start afresh, the code offers you respite, as you can now initiate insolvency proceedings on your own.

And if, as an individual, you have lent large sums of money and are unable to recover them from your debtor, you too can hope for better tidings under the code.

Here’s what you need to know about the insolvency process outlined in the bankruptcy code.

What’s changed?

The main issue with the earlier bankruptcy process in India was that there were multiple laws governing insolvency. This delayed the entire resolution process. There was a lot of confusion on which judicial forum to approach; the bankruptcy code of 2016 put that to rest.

The law can impact you as a creditor and debtor. Much like banks and financial institutions, individuals too often throw good money after bad. The IBC 2016 now allows an individual who is not able to recover his/her money to file for an insolvency process. An individual creditor or group of creditors can hire an insolvency resolution professional to initiate the process through an application filed with the authorities. The resolution professional then coordinates the application, initiates the valuation of assets and more. With the new code gaining ground, many firms have started to offer such professional services. You can file your application with the help of these professionals, who will, in turn, file the application with the concerned authorities.

While the authority for corporate cases is the National Company Law Tribunal (NCLT), the Debt Recovery Tribunal (DRT) handles personal insolvency cases. The adjudication authority then admits the application for an insolvency resolution process.

The resolution plan is then drafted, which ensures that whatever possible is recovered from the borrower. Once the repayment plan is approved and the debtor pays the amount, the case is closed. Both the lender and the borrower get to move on.

Asset liquidation

But what if all the creditors are not on the same page? What if the insolvency process fails due to the inability of the borrower to honour payments under the newly-drawn-up resolution plan?

In such cases, the matter goes into bankruptcy or liquidation (of assets). The adjudicating authority issues a bankruptcy order. This is followed by the issuance of a public notice, wherein the creditors can claim from whatever is available based on the valuation of assets. It is in the interest of both the lender and borrower to try and resolve the matter before going into bankruptcy. Why?

Once it goes into liquidation, the process could take longer (only the resolution is time-bound — 180 days plus a 90-day extension.). Also, in the process, you as a lender may end up recovering only a very small amount from the debtor.

As a borrower

It is not always lenders who need to recover money fast and move on. Sometimes, if you, as a borrower, are caught in a debt trap, you would like to start afresh and settle the matter with your creditor at the earliest. The interesting aspect with the new code is that it allows the debtor/borrower to initiate the insolvency-resolution process once they have defaulted on a debt.

So, if you feel that you do not have money to pay your creditors, you can also file an application with the authorities. The authorities then employ an insolvency resolution professional to assess whether a person is worthy of a fresh start or not. This is done based on the borrower’s income and assets and their debts. It is then decided how much they can pay and once that is settled, the debtor can have a fresh start.

If you are an entrepreneur, burdened with huge debt, you still have the chance to move on to new pastures. Remember, though, that this should be used as a last resort. Filing for bankruptcy can affect your credit score and hence, your future borrowing capacity.