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Wholesale Reform of Indian Insolvency Law

posted by Jason Kilborn

IndianpiggybankOn Wednesday of this week, the Indian Ministry of Finance released a draft of a watershed Insolvency and Bankruptcy Bill, 2015. The proposed reform covers all of Indian insolvency law, both corporate and personal. A summary of the key proposals is here. While reform efforts earlier in the year concentrated on business recovery, at least 50% of this latest bill concerns a total revamp of the personal debt relief process. These provisions are long overdue. In a fabulous case study a few years ago, Adam Feibelman described both the growth of the personal lending sector in India, as well as the serious structural deficiencies of the century-old Indian regime of personal debt relief (bankruptcy). Among the biggest problems: multi-year delays as cases wind through the civil judicial system, brought on in part by excessive judicial discretion with respect to case administration, including admission of debtor petitions, stays of enforcement, and ultimate debt discharge relief. The bill makes significant progress on several fronts, though it leaves much to be desired.

On the one hand, the reformers dealt decisively with the core of the problem. Authority over personal debt relief cases was reassigned from ordinary civil courts to new "Debt Recovery Tribunals." (ss. 78, 179). These DRTs were created in a 1993 reform of the system of enforcement of debts to banks and other financial institutions. Not only are these DRTs more focused on issues arising in debt collection matters, they have two powerful advantages over ordinary civil tribunals: Rather than adhering to laborious and formalistic civil procedural law, the DRTs use summary procedures "based on the rules of natural justice," and they answer to the Ministry of Finance, rather than the High Court. Putting a particularly fine point on the matter, section 180 of the bill provides explicitly, "No civil court or authority shall have jurisdiction to entertain any suit or proceedings" and "No injunction shall be granted by any court, tribunal or authority" with respect to any matter over which the DRTs have authority--that is, virtually any matter related to a pending personal debt relief case. This concentration of authority before a specialist adjudicatory body should be a marked improvement over current practice.

On the other hand, the reformers have not let go of several nagging instances of discretion and uncertainty. The law seems to have removed discretion as to the terms of a debt discharge upon completion of a case, but the law still says that the DRT "may" enter a discharge order after a payment plan case (s. 119), while such an order "shall" be passed after a bankruptcy case (s. 138). A moratorium (stay) on enforcement actions enters automatically upon submission of a debt relief application (ss. 96, 124), but admission of the application (and continuation of the stay) remains subject to discretion. The discretion is exercised in the first instance by the insolvency professional chosen by the debtor or appointed by the DRT: the standard for accepting applications from non-indigent debtors is not insolvency, inability to pay debts, overindebtedness, or any other internationally recognized factor, but rather "the resolution professional may exercise his best judgment while recommending acceptance or rejection of the application." (s. 99(7)). That's it. No standard at all, just "best judgment." In contrast, an indigent debtor (with income below 60,000 rupees per year, on the lowest rung of the income ladder before absolute poverty) can seek a "fresh start process" only if s/he is "unable to pay his debts." (s. 80(1)). If this is not an oversight, the system for non-indigent debtors under the bill is worse in terms of discretion and unpredictability than the old system.

The biggest problem(s) in my view relate(s) to the multi-stage process, reflecting an international obsession with the fanciful notion of debtors' just working something out with their creditors. Debtors with no reasonable future payment to offer their creditors cannot simply choose or even be routed to a process of asset liquidation and immediate discharge. Rather, for non-indigent debtors (whose summary relief is rather limited), debt relief requires a mandatory two-step process of (1) the debtor's proposing a payment plan to creditors for their (inevitably negative) vote, only after which may a debtor (2) apply for asset-liquidation-and-automatic-discharge bankruptcy relief. (ss. 105, 121(1)(b)--s. 106(2) mentions the possibility that the insolvency professional might recommend that a meeting of creditors not be convened, but the law makes no further provision for this possibility). It gets better: The debtor's proposed plan is accepted by creditors only by the affirmative vote of creditors holding 75% of admitted claims. (s.111). Are you kidding me??!! Anyone who has spent one minute looking at international empirical research in this area knows that personal insolvency proposals are supported by 75% of creditors by value in approximately  ... zero cases (O.K., there are some, but the number rounds to zero, and these few cases are usually thanks to concerted effort or even pressure from a regulator or governmental body). One can confidently predict that NO cases will be resolved in the mandatory payment plan negotiation process in India, simply delaying the bankruptcy process to follow.

While the relief in the bankruptcy process is automatic, non-discretionary, and relatively quick (within one year of commencement), there is one final oddity in the Indian proposal: Along with the standard items, like fines and family maintenance debts, the list of debts excluded from discharge (s. 139) mentions "liability to pay damages for negligence, nuisance or breach of a statutory, contractual or other legal obligation." (s. 79(14)). What??? Isn't every monetary debt encompassed within this description? My failure to pay on a loan contract produces "liability for damages for  ... breach of a ... contractual ... obligation," no? Maybe Indian obligations law contains some nuance of which I'm unaware?

Particularly in the personal debt-relief process, it seems that the Indian proposal would greatly benefit from some refining, but it represent a much-welcome and substantial improvement over the current state of affairs. The government intends to submit this bill to Parliament in the impending winter session--keep your fingers crossed!

Image courtesy of Shutterstock


This is good news. Over five years ago I reviewed the the recommendations of the Indian Assessment Committee. The Committee had been appointed by the Reserve Bank of India, one of the best-functioning elements of India's labyrinthine bureaucracy. The Committee's recommendations went only to reform of the insolvency regime for corporate debtors. I am very pleased to see that the proposed legislation will address the needs of individuals as well. Current Indian individual insolvency law is a patchwork of laws left over from British colonial days. Of course, many things can (fail to) happen in India's Parliament for reasons that are extraordinarily opaque, even to well-informed Indians so I would not hold my breath waiting for final legislative approval.

Excellent choice of clip art! I'm impressed (and also more knowledgeable now).

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