Personal insolvency law part of IBC 2016 needs a revisit

A significant section of the recently enacted Insolvency and Bankruptcy Code, 2016 (the Code) that has gone entirely unnoticed and received little media attention is the provisions introduced for the insolvency and bankruptcy of natural persons.  The Code paves way for reforms in the archaic personal insolvency law once notified.  The two statutes dealing with insolvency of natural persons, proprietorships and partnerships in vogue - Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920, are outdated and inadequate. 

While the government deserves a pat on the back for taking up personal insolvency law for reform, its approach in preparing and passing this unique and complex legislation is flawed and expected to offer serious implementation challenges.  Personal insolvency is not only an economic phenomenon but has deep social and cultural connotations.  It is perceived differently by various sections of society, and his different implications for individuals and communities, and the social fabric they are part of.  The Code will apply to over 1.2 billion people living across the country with diverse cultures, traditions, customs and way of life. Filing bankruptcy is considered stigmatic in many societies in India as it impacts the social standing of individuals as also of their family members.  People hesitate in declaring bankruptcy because of the fear of being ostracized by the society.  The insolvent person loses credibility in the eyes of future creditors. This is one reason the personal insolvency is not used actively in our country.  These issues should have been adequately addressed before drafting/passing the new law. 

An extensive deliberation and discussion across the country should have preceded the enactment of a law dealing with bankruptcy of natural persons. Detailed consultations with state governments; local bodies and members of communities from different cultures and strata should have been held before making recommendations and drafting of the Code.  Cultural-shift preparedness needs to be assessed and taken into account in preparing the legislative framework; otherwise implementation of the law would offer a number of challenges with concomitant delays.  We are often criticized for failure to effectively implement laws.  Pre-enactment deliberation and consultation with stakeholders is critical for successful implementation of law.

It was keeping in mind the complexities involved in dealing with bankruptcy of natural persons and non-incorporated entities in a big nation like our country, with a distinct and diverse cultural and social framework, that the framers of the Constitution of India vested the jurisdiction to legislate on this subject with the state governments (Refer entry 32 in State List in Seventh Schedule of the Constitution of India), and the Parliament of India was vested with the power to legislate on bankruptcy of incorporated entities (Refer entry 43 & 44 in Union List in the Seventh Schedule of the Constitution of India).  The bankruptcy and insolvency appears in the Concurrent List as a germane subject. 

The stakeholders, principles, approach and outcomes of personal insolvency are different from that of insolvency of corporations. One-size-fits-all approach to the entire population may not be suitable.  The government should avoid bottom-down approach. Instead it should persuade state governments to legislate on this law by convincing them of the merits of having a vibrant personal insolvency law.  Alternately, more suitable, and constitutionally consistent approach may be for the central government to prepare a draft of model state legislation, in consultation with experts and stakeholders. The state governments could be persuaded to adopt with such suitable changes as their local dynamics may require.

Notwithstanding the above, vesting Debt Recovery Tribunals (DRTs) with jurisdiction to deal with personal insolvency and bankruptcy resolution is likely to adversely impact an equitable access to resolution and the speed thereof.  Most DRTs are located in state head quarters. Suicide by farmers has been of great concern. It is important that natural person insolvency law is framed after assessing how it impacts or benefits farmers. As framed presently, the Code does not provide easy access to farmers. Traveling long distance from a village or small town to file or participate in an insolvency proceeding involving small amounts will also be time-consuming and rigorous.  Moreover, DRTs are already over-burdened with work and suffering from backlog of cases. To add this massive jurisdiction to them will impact the quality of their work in another key area – the recovery of debt and unlocking key assets locked in litigation to be reallocated back into economy.  It is for this reason therefore that the District Courts were given the jurisdiction to handle bankruptcy cases in the current legislative framework.