“I HAVE NO MONEY, FORGIVE ME?”
“SEE YOU OUTSIDE COURT”
To understand what role a process plays in making another process easier, it is first essential to understand the two processes individually. The ultimate aim of this series of articles is for you intelligent folks to consider the possibility of not making it big in the future and then weighing out your options, which will primarily revolve around keeping you outside court and paying back those huge loans (that you still have the opportunity of not taking). Too serious for a bunch of people having quarantine fun/drain? Let us dial it down a notch. Instead of envisioning yourself in that situation, take the example of an overconfident billionaire who is now facing some serious ‘money problems’.
Hopefully, when (if?), you progress towards the end of this series, you will have answers to the following questions.
- What is the current personal insolvency regime in India like?
- What do you mean by Alternate Dispute Resolution (ADR)?
- How are the two related?
- Is it possible to make cumbersome insolvency proceedings easier by settling them outside court in a country like India?
Personal insolvency in India
The Insolvency and Bankruptcy regime in India has come a long way from its inception in 2016. The law has been constantly tested and has evolved with due course of time. However, personal insolvency is one aspect which is not fully developed yet. In fact, it will soon be in the experimental stage. Simply put, individuals, for the sake of the Insolvency and Bankruptcy Code, 2016, have been put into three categories. Personal guarantors to corporate debtors, partnership firms and finally, at the bottom of some chain at least, people like you and me. Till date, only the provisions with respect to personal guarantors have come into force, with the rest to follow soon. With the system being ‘under maintenance’, we have the opportunity to put more ideas and thought into it, and further, conduct a deeper analysis when the provisions actually come into force.
Insolvency may be declared when a person is in a less income-more debt situation. For an individual, an application for insolvency can be filed if the invoked debt reaches the required threshold (the minimum amount of debt to be owed to make filing possible), by the creditor or the debtor himself, with the ambit of the word creditor being expansive enough to include friends and family. Once an application is filed, the proposed provisions in Part III provide us with two ways to approach insolvency.
The first is the route of the “insolvency resolution process” followed by “bankruptcy”.
The second is the route of a debt-waiver through a “fresh start”.
The choice of the route depends on specific eligibility criteria, and the IRP-bankruptcy route seems to be the preferred route for most insolvencies. The ‘adjudicating authority’, that is, the appropriate court here, is the Debt Recovery Tribunal. But owing to various reasons, like the sparse existence of DRTs, the Insolvency Committee has now recommended that the appropriate authority to adjudicate these cases be the Insolvency and Bankruptcy Board of India. Regardless, these processes are both judicial in nature and thus naturally cumbersome, uncertain and expensive. What does a poor director of a failing company do when the creditors chase him for the humungous loans of the company? The proceedings may just tarnish his reputation in the market along with rendering his wallet empty. The analysis will soon follow.
The aspect of Alternate Dispute Resolution
For now, let us focus on what may make these processes easier and prevent the unfortunate person from going bonkers. Just the soon to be common threat, ‘See you outside court!’ is our lawful substitute. Alternate dispute resolution is a field which explores the possibility of an amicable settlement and a win-win situation instead of a definite win-loss.
It includes negotiation (basically some chit chat with your friends where you sit on opposite sides of the table), mediation (which is negotiation with a third party that does the job of keeping you calm) and arbitration, which is, simply put, private litigation. Mediation and Conciliation are two methods of conflict resolution in which a third-party is involved. Unlike the conciliator who has an active role in the conciliation process (he can propose a solution to end the conflict), the mediator assists the parties throughout the mediation process to help them find a solution to their dispute by themselves.
Some debtors may be apprehensive to approach courts due to issues such as facing the stigma of insolvency, being unable to afford the administrative costs of a formal insolvency process, concerns of impact on credit history, etc. Further, personal insolvency involves debtors who may be in significantly distinct circumstances. Consequently, different kinds of processes may be suitable to different kinds of debtors, and ‘a one-size fits all’ approach may not be suitable for personal insolvency. Additionally, while court-led formal insolvency processes aid distressed debtors in either managing repayment to creditors or in availing discharge, such processes in isolation may not sufficiently achieve the social insurance aim of personal insolvency, i.e. rehabilitating the debtor. This is where we will try and analyse the scope of settling personal insolvency situations outside the court.
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