Recovery of Debts by Individuals

Ever since the inception of business the recovery of the pending payments has been a haunting process. The business owners have to go through numerous sleepless nights in tension of the mounting debts that need to be recovered. The pilling debts become an obstacle in smooth running of the main business as the business owners have to divert their attention from the running business towards the recovery of these pilling dues. Over a span of time when business starts to yield results then it no longer remains a challenge rather debt monitoring and timely recovery of outstanding debts become the challenge that needs to be resolved with due time.

The phase of debt recovery is a cumbersome process but if structured in planned manner then it becomes an easy process to get rid of the same in a time bound and efficient manner. In order to efficiently recover the pending debts and to become debt free one needs to sit and plan out the debt recovery strategy using which he may target the further process. Properly planned and laid out debt recovery strategy ultimately lead to successful recovery of debt in an easy and lucid manner.

The individuals in the daily course of business provide goods and services to numerous categories of consumers on both cash and credit terms. The goods or services are provided on fixed duration credit period like for some credit period is 30 days and for some it ranges between 60 to 90 days depending on the nature of goods or services supplied. The consumers are required to make the requisite payment after the expiry of agreed credit period. If after the expiry of credit period the payment is not received then this is the starting point of debt pilling which needs to addressed and taken off within due time.

Even after providing the appropriate goods and services as requested the individuals do not receive payment for the supply then as a part of debt recovery mechanism the concern individual must send a gentle written reminder to the concerned person to whom they had made the supply requesting for the payment in relation to the supply made along with a copy of proper invoice.

After sending a gentle reminder the individual need to be patient and wait for a reply from the other end. It is well known that the reply will not come instantly but would take time of 3 to 5 days. The reply may be: positive wherein the person would make the payment or provide a further date by which he would surely make the payment or the reply may be negative wherein the person on the other end would either highlight in defects in quality of supply provided or refuse to make the payment for the received supply. The positive reply is not much matter of concern but the negative reply build in pressure and creates uneasy stressful scenarios. In such situation the panic level of the individual begin to rise.

In the scenario of receipt of negative reply the next step available with individuals for recovering their debts is taking the recourse and support of appropriate enacted legislations for recovering the pending dues. The individuals were always kept into purview while drafting the debt recovery laws. There have been numerous laws in protection of individuals.

The need of laws was of high importance as industrialist in India had started entering into all the possible domains to expand their business and thereafter to increase the risk taking capacity. The private and public institutions began competing to lend to lend these industrialists at very cheap rates. Companies started investing in long term projects on the support and backing of short term loans taken in floating interest rates. Soon the inflation rates and interest rates began to rise. Then the industrialist stared facing difficulty in repaying the loan back at high interest rates. Adding to the havoc the inflation began to soar high thereby raising the prices of the products leading to decline in income from ongoing projects. The corporates started to commit default in paying back the loans as a result of which the lenders had no other remedy apart from approaching the courts for way forward. The turmoil did not end here. Banks started reflecting NPAs in their balance sheets. A high percentage of bad debts in the form of NPAs were from corporates.

Keeping into purview the aforesaid chaos the need of the hour was to have appropriate legislation that would curb the situation from going out of control and thereafter pave the way forward to get rid of the pending debts. The enactment and drafting of suitable legislation was not an easy and rapid process but required time to come up with something that could tackle and solve the ongoing situation.

On this note the legislative framework that that was crafted to beat the ongoing situation which has delivered positive results and which will continue to deliver the same results will be discussed further in this article.

The legislative framework that has been and is an aid for the individuals to recover their debts can be bifurcated under two heads:

• Pre IBC or Prior to enactment of Insolvency and Bankruptcy Code
• Post IBC or After the enactment of Insolvency and Bankruptcy Code

Pre IBC/ Prior to Enactment of IBC

During the initial phase of debt recovery there were numerous debt recovery laws wherein each law had its own recovery mechanism and debt recovery time frame. The laws were crafted for both the corporates and individuals providing them respective mechanism to recover their respective pending debts. The few laws that were enacted are as follows:

1. Presidency Town Insolvency Act ,1909
2. The Provisional Town Insolvency Act,1920
3. Sick Industrial Companies (Special Provisions)Act (SICA),1985
4. Recovery of Debts due to Banks and Financial Institutions Act (RDDBFI),1993
5. Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI),2002

Of the above-highlighted legislation only the first two i.e. Presidency Town Insolvency Act, 1908 and the Provisional Insolvency Act, 1920 were concerned with resolving debt recovery for individuals. The remaining three i.e. Sick Industrial Companies Act, 1985; Recovery of Debts due to Banks and Financial Institutions Act, 1993 and Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 were devised specifically for corporates.

In this article since our focus is on debt recovery by individuals and so we will discuss the first two legislations briefly.

1. Presidency Town Insolvency Act ,1908

The Presidency Town Insolvency Act 1908 came into force with effect from 1st January 1910.Under the Act the High Court of Madras, Calcutta and Bombay had the express jurisdiction to entertain the cases related to insolvency that came up for being resolved under this act. Prior to independence, India was divided into presidency towns by the Britishers for better and efficient administration and so the aforesaid act laid down provisions in relation to insolvency for presidency towns.

The matters that came for being resolved under the act were discharged by the single judge who was to be appointed by the Chief Justice of the High Court. The above highlighted high courts were given express authority to decide matters related to insolvency along with deciding question related to insolvency. Even the courts had the power to review, rescind or vary the order passed. The main aim of the act was settlement of debts to creditors pending with the debtors.

2. Provisional Insolvency Act,120

The Provisional Insolvency Act, 1920 came into effect from 25th February 1920.The act laid down laws in relation to insolvency for administration by courts having jurisdiction outside the presidency towns.

Under the Act the district courts were given the express authority and jurisdiction to entertain the matters. Also the government had the power to delegate to the same authority to any other court via a notification and in that case the court granted the power would act as Small Causes Court. Here it is important to note that the Small Cause Courts shall be subordinate to the District Court. The decision of the Court in relation to the Small Cases Court shall be final and binding. The appeals against the order of subordinate courts shall be filed to and would be appealable in the district code. The offences if any committed by the debtor would also be punishable as per the relevant provisions as enshrined in the code.

The main intent behind the enactment of the Provisional Insolvency Act 1920 was to have in place strict laws for debtors thereby preventing toss to creditors.

Both the Presidency Town Insolvency Act, 1909 and Provisional Insolvency Act, 1920 provide for the legal framework in relation to the insolvency process for individuals. The provisions of the acts are to some extent similar but they differ in the jurisdiction and the legislative authority.

Under these laws an insolvency petition can be filed for an amount exceeding Rs. 500. But while filling the petition it should be ensured that the act of insolvency on the basis of which the petition is filed should have occurred within a span of 3 months from the filling date.

Abhishek Jain at MUDS after deep review of the case laws is of the opinion that “At the time of filling the insolvency petition the crucial conditions as highlighted in the Acts based on which the petition has been filed against the individual need to be proved by the creditor. The court will not admit the petition unless the ground based on which the petition is filed are proved forth the court.”

After analysis and study of the filed petition if the conditions for filling the petition are met then in such scenario the court may accept or reject the filed petition.

The provisions for individual have yet not been notified under the IBC. Meanwhile the above described legislation will deal with the matters in relation to the individuals. Once the provisions are streamlined in IBC them these acts shall stand repealed. The efforts are being made to streamline and implement the provision as enshrined in the IBC but presently implementation will take some more time.

Post IBC/ After the enactment of IBC

The Insolvency and Bankruptcy Code was enacted and came into force with effect from December 2016. The code extends to the whole of India but the provisions related to insolvency of individuals are not applicable in Jammu & Kashmir.

In the three years since enactment, the entire ecosystem comprising has been in place. The provisions relating to corporate insolvency resolution have been operationalized with great success. Now that the corporate insolvency resolution processes have been streamlined its time to focus on individual insolvency.

Individual insolvency framework pursues the objectives enshrined in the code. It prevents the creditors from harming the debtors by racing to be the first to recover their dues and thereby facilitates the insolvency resolution. It facilitates an individual to get in and get out of business undeterred by honest business failure and thereby promotes entrepreneurship. It increases the creditors expected returns and thereby promotes availability of credit.

In the scenario of default by individual, a creditor had two remedies – against the person of the debtor or against the property. Historically the remedy was directed towards the person. Presently with the focus on revival of the debtor instead of adjudging him insolvent, the code provides:

• An objective trigger for initiation of insolvency resolution process instead of relying on the commission of an act of insolvency.
• Mandates a moratorium which provides relaxation to the debtor and creditor for negotiating repayment plan.
• Use of independent and qualified professionals to assist the stakeholders in conduct of the processes.
• Debt recovery Tribunal(DRT) as the adjudicating authority to administer the matters related to individual insolvency.

Prerequisites for debt recovery via IBC

• The minimum amount of default to be recovered should be atleast one thousand rupees.
• The debt to be recovered should a debt that was due for recovery after December 2016.
• There should be evidences of written communications made in relation to the debt due to be recovered.
• There should be proper copy of agreements and deeds that were entered as evidence in support to highlight the pending debt.

The recovery processes with the help of which the individual can recover their debts as enshrined under the IBC are as follows:

1. Fresh Start Process
2. Insolvency Resolution Process
3. Bankruptcy Process

Fresh Start Process

This is available only to those debtors who have annual income less than or equal to Rs. 60,000; assets less than or equal to Rs. 20,000; debts less than or equal to Rs. 35,000 and does not own a dwelling unit. A resolution professional examines the application and thereafter submits his report to the DRT suggesting the acceptance or rejection of the submitted application. The discharge order as passed by the DRT writes off the unsecured debts thereby allowing the debtor to start afresh.

The fresh start process an opportunity to a debtor who is unable to pay his debts to clear off his debts in a time bound manner on fulfilling the prescribed condition for fresh start of his qualifying debts. Since the essence of the code is to have time-bound process and so on this note the time lag for completion of entire process of fresh start is 180 days, to be counted from the date of admission of application for the fresh start process.

The intent of fresh start process to provide debtors with comparatively small debts a chance to discharge off their debts and restart afresh without any liability. The fresh start process is an alternative to the insolvency and bankruptcy processes. To prevent and curb the abuse of this debtor centric process, the code has aligned certain restrictions on the applicability and validity of fresh start process.

Insolvency Resolution Process

This provides a framework for debtors and creditors to collectively renegotiate a proper repayment plan under the supervision and guidance of a resolution professional. The debtor or the creditor may make an application for initiation of insolvency process.

On admission of application a public notice is issued by the resolution professional to all the creditors for inviting their claims. Thereafter a repayment plan is drafted by the debtor in close contact with the resolution professional. On execution of repayment plan a discharge order is passed by the DRT thereby releasing the debtor concerned from his liabilities. Through this process the debtor gets an earned start.

The insolvency resolution process is the initial step that can be taken against the defaulting individual & partnership firms. On successful completion of insolvency resolution process or during the course of the insolvency resolution process an application can be made for bankruptcy order. During the course of the insolvency resolution process all persons be it debtor or creditor shall cooperate with the appointed resolution professional so that he may efficient execute the process of insolvency resolution and thereby seek discharge order.

Bankruptcy Process

In the scenario where the resolution process fails or drafted resolution plan is not implemented properly then n such a state the debtor or creditor may make an application for initiating bankruptcy process. When the application for bankruptcy is admitted by the DRT a bankruptcy order is passed and thereafter a bankruptcy trustee is appointed.
The bankruptcy trustee conducts investigation of the affairs of the bankrupt, realizes the estate of the bankrupt and distributes the proceeds in the order of priority as highlighted in the code. After expiry of one year from the bankruptcy commencement date or within seven days of approval by the committee of creditors, the bankruptcy trustee applies for a discharge order. The discharge order releases the debtor from bankruptcy debt.

it is evident that bankruptcy gives a possible way to the bankrupt to cope and renovate himself. It depends on the decision of the bankrupt as to what he decides in such a situation. Bankruptcy is a situation which can be resolved by being calm and controlling the finances which will thereby act as the greatest stress reliever. It is a onetime situation which can be tapped if detected within due time. People wait until the last minute to approach the bankruptcy lawyer’s office because they don’t want to be in the bankruptcy lawyer’s office.

“We at MUDS hope that people recognize that bankruptcy is still an option for them and that the only requirement is that the bankrupt needs to be proactive and vigilant in resolving the bankruptcy as early it can be done.”

The provisions related to individual insolvency have not yet been notified. The Code covers insolvency resolution of three categories of individuals’ namely: personal guarantor to corporate debtor; partnership firms & proprietorship firms and other individuals. In the first phase of implementation personal guarantors would likely be brought within the purview of implementation. Then in the second phase it would be the partnership & proprietorship firms that would be bought into implementation.

Therefore after gaining insight of the proposed processes to be streamlined under IBC, it is crystal clear that that IBC is a more time bound and deadlines based processes which help in quicker resolution thereby giving the defaulting debtors an opportunity to rectify their debts along with rehabilitation opportunities.

Thus after extensive study of the above-discussed legislations it’s quite clear that laws on individual insolvency are and have been a spider’s web. There has been a rise and fall of insolvency regime where each law came to replicate thee other without bringing any significant change. The IBC came as one stop solution covering the bright side of every failed insolvency regime. All prior laws started with positive energy however failed to go long in the race of successful implementation thereby repealing them over time.

Hope this article was informative in providing an insight about the recovery of debts by the individuals.
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