INTRODUCTION
The IBC is a comprehensive legislation in India that aims to consolidate and amend laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals. While most attention is often given to the Corporate Insolvency Resolution Process (CIRP), the IBC also includes a significant mechanism called the “Fresh Start Process.” This article is providing deep insight of the Fresh Start Process under the IBC and its potential to provide a new beginning for eligible individual innocent debtors.
A fresh start process is a process wherein the eligible debtors are discharged from certain debts within a specified threshold and can start afresh without any liabilities. The fresh start process has been conceptualized for persons who owe relatively less amount of money and have little or no income or assets to repay their debts. Once a person makes an application to the Adjudicating Authority and the application gets accepted, they are discharged from the qualifying debts and are not required to repay such debts.
This is a gist about fresh start process. Let’s discuss below about it in brief.
ELIGIBILITY
The fresh start process is enshrined under Part III of the code which is not notified. Adjudicating Authority Part III of the code means the Debt Recovery Tribunal which is considered to be the adjudicating authority of the Fresh start process.
1. According to section 80 of the Code, 2016. A debtor, who is unable to pay his debt and fulfils the conditions specified in subsection (2), shall be entitled to make an application for a fresh start for discharge of his qualifying debt under this Chapter.
2. A debtor may apply, either personally or through a resolution professional, for a fresh start under this Chapter in respect of his qualifying debts to the Adjudicating Authority if –
(a) the gross annual income of the debtor does not exceed sixty thousand rupees;
(b) the aggregate value of the assets of the debtor does not exceed twenty thousand rupees;
(c) the aggregate value of the qualifying debts does not exceed thirty -five thousand rupees;
(d) he is not an undischarged bankrupt;
(e) he does not own a dwelling unit, irrespective of whether it is encumbered or not;
(f) a fresh start process, insolvency resolution process or bankruptcy process is not subsisting against him; and
(g) no previous fresh start order has been made in relation to him in the preceding twelve months of the date of the application for fresh start.
WHAT IS QUALIFYING DEBT??
A “qualifying debt” means amount due, which includes interest or any other sum due and does not include –
- an excluded debt;
- a debt to the extent it is secured; and
- any debt which has been incurred 3 months prior to the date of the application for fresh start process.
WHAT IS AN EXCLUDED DEBT??
An “Excluded debt” means: –
- liability to pay fine imposed by a court or tribunal;
- liability to pay damages for negligence, nuisance or breach of a statutory, contractual or other legal obligation;
- liability to pay maintenance to any person under any law;
- liability in relation to a student loan;
- any other debt as may be prescribed.
INTERIM MORATORIUM
A person who is eligible as per section 81 may make an application for initiation of a fresh start process. An application for fresh start may be made either by the debtor himself or through a resolution professional before Adjudicating Authority. The Interim Moratorium shall commence from the date of submission of application and shall cease to have effect until the application is accepted or rejected by the Adjudicating Authority.
- Date of Commencement – date of filing of application
- Date of Termination – date of admission or rejection of the application
PROCESS OF FRESH START
The following process is required to be followed once an application for initiation of the fresh start process is filed –
1. Appointment of Resolution Professional
The first step is the appointment of a resolution professional who is required to take the process forward. The Adjudicating Authority shall by an order appoint the resolution professional recommended or nominated by the Board. A resolution professional appointed by the Adjudicating Authority shall be provided a copy of the application for fresh start.
[ NOTE – The process of appointment of resolution professional is the same as given in the process for Resolution of Individual/Firm Insolvency]
2. Examination by Resolution Professional
Under Section 83 provides that once the resolution professional is appointed, they are required to examine the application within 10 days and submit a report to the Adjudicating Authority, either recommending acceptance or rejection of the application. While making the recommendation, the resolution professional may call for any extra information that they may require and the applicant is required to provide the same within 7 days of such call for information.
The resolution professional shall recommend the acceptance of the application if they are satisfied that –
- the information supplied in the application indicates that the debtor is unable to pay his debts and they have no reason to believe that the information supplied is incorrect or incomplete; and
- there is no change in the financial circumstances of the debtor since the date of the application enabling the debtor to pay his debts.
However, the resolution professional shall recommend the rejection of the application if it is found that–
- the debtor is not eligible for a fresh start process; or
- the debts disclosed in the application by the debtor are not qualifying debts; or
- the debtor has deliberately made a false representation or omission in the application or with respect to the documents or information submitted.
ADMISSION OR REJECTION BY ADJUDICATING AUTHORITY
Section 84 prescribes that the Adjudicating Authority shall make an order either accepting or rejecting the application for initiation of a fresh start process within 14 days of submission of report by the resolution professional. If the application is accepted, a fresh moratorium period gets initiated against the debtor. And if the application is rejected then the applicant become remedy less.
Effect of Moratorium Period
The following are the effects of the initiation of a moratorium period –
a) any pending legal action or legal proceeding in respect of any debt shall be deemed to have been stayed;
b) the creditors shall not initiate any legal action or proceedings in respect of any debt
c) the debtor is barred from –
i. acting as a director of any company, or directly or indirectly taking part in or be concerned in the promotion, formation or management of a company;
ii. disposing of or alienating any of the assets;
iii. travelling outside India except with the permission of the Adjudicating Authority
d) the debtor is further required to
i. informs his business partners that he is undergoing a fresh start process;
ii. inform prior to entering into any financial or commercial transaction of such value as may be notified, either individually or jointly, that he is undergoing a fresh start process;
iii. disclose the name under which he enters into business transactions, if it is different from the name in the application admitted.
OBJECTIONS BY CREDITOR
Section 86 provides that any creditor, amount due to whom, gets discharged as a part of the fresh start order, may file an objection with the resolution application within a period of 10 days from the date of receipt of the order. However, the objection can be filed only on the following grounds, namely:
- inclusion of a debt as a qualifying debt;
- incorrectness of the details of the qualifying debt specified in the order under section.
The resolution professional shall examine the objections and either accept or reject the objections, within 10 days of the date of the application.
APPLICATION AGAINST DECISION OF RESOLUTION PROFESSIONAL
Section 87 provides that any person aggrieved by a decision taken by the resolution professional on an objection filed by them may make an application to the DRT. However, the application must be filed within a period of 10 days from the date of the decision taken by the resolution professional and shall be filed on the following grounds only –
a) that no opportunity was given to the debtor or the creditor to make a representation;
b) that the resolution professional colluded with the other party in arriving at the decision;
c) that the resolution professional did not comply with the requirements of section 86.
The DRT is required to decide upon the application within 14 days of its submission.
REVOCATION OF FRESH START PROCESS ORDER
Section 91 sets out the grounds on which the resolution professional may submit an application to the DRT seeking revocation of its order made for initiation of the fresh start process. The object of section 91 is to provide for rescinding the fresh start process where due to any change in the financial circumstances of the debtor, the debtor becomes ineligible for a fresh start process or the debtor acts in violation of certain provisions of the Code. The resolution professional may make an application seeking revocation of the order admitting application for fresh start process on the following grounds-
- if due to any change in the financial circumstances of the debtor, the debtor becomes ineligible for a fresh start process; or
- non-compliance by the debtor of the restrictions imposed; or
- if the debtor has acted in a mala fide manner and has wilfully failed to comply with the provision of IBC,2016.
The DRT has to decide upon the application within a period of 14 days and a copy of the same should be provided to the IBBI for entering into their records.
DISCHARGE ORDER
Section 92 provides for the passing of a discharge order by the Adjudicating Authority at the end of the moratorium period for discharge of the debtor from the qualifying debts. The resolution professional shall prepare a final list of qualifying debts and submit such list to the Adjudicating Authority at least 7 days before the moratorium period comes to an end.
On receiving the list and at the end of the moratorium period, the Adjudicating Authority shall make an order discharging the debtor from the qualified debts.
The order may also provide for the following–
a) penalties in respect of the qualifying debts from the date of application till the date of the discharge order;
b) interest including penal interest in respect of the qualifying debts from the date of application till the date of the discharge order;
c) any other sums owed under any contract in respect of the qualifying debts from the date of application till the date of the discharge order.
The discharge order shall be forwarded to the Insolvency and Bankruptcy Board of India for the purpose of recording an entry in the register.
LIMITATIONS
The Fresh Start Process under the IBC serves as a hope for honest individual debtor who is facing financial distress. By providing a mechanism for debt relief and a genuine fresh start, it encourages entrepreneurship, financial rehabilitation, and social reintegration. It allows individuals to restart his/her life afresh without any debt pending. It could be a remedy to this credit market of Individuals. This process will provide relief to small debtors. Despite its potential benefits, the Fresh Start Process remains less known and less utilized compared to the Corporate Insolvency Resolution Process (CIRP). Many eligible debtors may be unaware of their rights under this process or may face challenges in navigating the legal procedures to initiate the process successfully. The legal procedures and documentation requirements might be overwhelming for debtors without proper legal representation, potentially leading to delays or rejections of applications. Also, the Fresh Start Process is designed to be simpler than the CIRP, it still involves legal procedures and compliance requirements. For financially distressed individuals who may not have access to legal assistance or may not fully understand the legal intricacies, this can be a significant barrier to availing the benefits of the process. Another Drawback that the eligibility criteria for the Fresh Start Process can be quite stringent, making it challenging for many individuals to qualify. The low income and asset thresholds may exclude some genuinely distressed debtors who could benefit from debt relief. The number of Debt Recovery Tribunals (DRT) are very less than across the country. It involves seeking approval from the Debt Recovery Tribunal in which the caseload and processing times can lead to delays in resolving individual insolvency cases, potentially prolonging the financial distress of eligible debtors. It will be difficult at times for small individual borrowers to get relief and make a “fresh start”. However, the government may start to giving authority to the resolution professional for discharging the debt as specified limit which reduces the burden on the Adjudicating Authority and enhance the concept of Fresh Start Process under the Code.
CONCLUSION
While the Fresh Start Process under the IBC offers a ray of hope for eligible individual debtors seeking debt relief and a new beginning, it is not without its drawbacks. The limited scope, stringent eligibility criteria, and potential impact on creditworthiness are factors that need to be carefully considered. The process’s effectiveness relies heavily on the efficiency of the DRT and the awareness of eligible debtors regarding their options under the Fresh Start Process. As with any legal process, there is a need for continuous evaluation and improvement to make it more accessible, efficient, and effective. Policymakers and Authorities should address these drawbacks to ensure that the Fresh Start Process remains a valuable tool in promoting financial rehabilitation and providing a second chance to honest insolvent individuals in the Indian economy. Addressing these drawbacks and raising public awareness about the Fresh Start Process can help unlock its full potential as a meaningful tool for promoting financial inclusion and offering a second chance to those genuinely seeking a fresh start. Despite its drawbacks, the Fresh Start Process remains a crucial component of the IBC’s insolvency resolution framework, serving as a mechanism to provide second chances and financial rehabilitation to those facing genuine financial distress.
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