Individual insolvency should be the next big focus area of IBC reforms: Sahoo

India should look to make rapid strides towards introducing a comprehensive 'individual insolvency' regime now that it has achieved several milestones in corporate insolvency in recent years, according to IBBI Chairman M S Sahoo.

Giving a sense of direction to the reform agenda on IBC in the days to come, Sahoo has in an article —written for a special publication to commemorate 4 years of existence of IBC —also said that there may be a need to amend IBC to introduce the concept of pre-packs in India. Amendments to law may also be needed for the fresh start process to make it simpler, accessible and cost effective, Sahoo said in his write up on “Insolvency Reforms: A Road Under Construction”.

The publication—“Insolvency and Bankruptcy Regime in India: A Narrative”—was released by Minister of State for Finance & Corporate Affairs Anurag Singh Thakur on Thursday.

The Insolvency and Bankruptcy Code (IBC) has been hailed as a paradigm shift from the erstwhile insolvency regime in India in terms of its design, architecture and professionalisation of insolvency services.

Sahoo sees the reforms in the ‘individual insolvency’ as the next big focus area for IBC reforms. The IBC currently classifies individuals into three classes, namely, personal guarantors ( PGs) to Corporate Debtors; partnership firms and proprietorship firms and other individuals, to enable implementation of individual insolvency in a phased manner considering the wider impact of these measures.

“Individual insolvency in respect of PGs to CDs is in operation. Insolvency and bankruptcy in respect of other individuals should commence as the ecosystem for the same is in place”, Sahoo said in his article.

Sahoo said that the recommendations made by the Insolvency Law Committee for redesigning the ‘Fresh Start Process’ to make it accessible, simple, quicker and cost effective will require changes in the IBC along with development of a dedicated administrative mechanism, a cadre of insolvency advisors and a technology enabled platform. The Fresh Start Process allows debtors, who have an annual income <60,000, assets <20,000 and debts < 35,000 and do not have a dwelling unit, to seek discharge of debt and thereby protects them from coercive actions of creditors.

It may be recalled that ILC had made three major changes—(a) Shift from quasi judicial process to an administrative one, whereby dedicated debt relief officers oversee the process and issue debt relief orders at low-cost (b) shift from IPs to less costly insolvency advisors to assist and guide eligible debtors and (c) implementation of the FS process on an online platform accessible from anywhere.

Sahoo said that introduction of a regulatory framework for pre-pack insolvency resolution process would most likely require an amendment to the IBC. Meanwhile, a Government panel to recommend a framework for pre-packaged insolvency under the current insolvency regime is expected to submit its report this month.

A pre-pack is an agreement between secured creditors and investors instead of going in for any public bidding process. The Corporate Affairs Ministry had in March this year set up a sub-committee of the Insolvency Law Committee to propose a detailed scheme for implementing pre-pack and prearranged insolvency resolution process.

Having a pre-pack like those in developed jurisdictions will help in achieving faster insolvency resolution. The process would likely be completed much faster than traditional Corporate Insolvency Resolution Process (CIRP). Also, having a pre-pack would act as an important alternative resolution mechanism to the CIRP and would help lower the burden on National Company Law Tribunal ( NCLT), say insolvency experts. In a pre-pack, the incumbent management retains control of the company until a final agreement is reached. There are some drawbacks in pre packs such as reduced transparency.

Besides highlighting Group Insolvency and Cross Border Insolvency as areas that deserved attention, Sahoo also suggested that in the long run a separate Adjudicating Authority (AA) may be created under the Code to deal with all kinds of insolvency, liquidation and bankruptcy processes of corporates and individuals. It may be recalled that NCLT is now entrusted with the responsibilities of the AA under the Code. Sahoo also stressed the need for special dispensation for resolution of MSMEs, noting that typical CIRP type resolution is not conducive for resolution of their insolvencies. A specialised framework for financial service providers is also necessary, according to Sahoo.