Personal bankruptcy: Pure pie in the sky
This is ambition, indeed. Of course, there is nothing wrong with the concept. The problem is with the legal infrastructure India has in place: its size and capacity are puny in relation to the size of the population and the potential demand for bankruptcy proceedings.
True, our financial laws have loopholes that some errant individuals exploit, but there could also be genuine reasons for bankruptcy such as an economic downturn leading to loss of employment. So, giving some flexibility to individuals to restructure their loans makes sense.
The code would replace two archaic laws: the Presidency Towns Insolvency Act, 1909 (for the three erstwhile presidencies of Chennai, Kolkata and Mumbai), and the Provincial Insolvency Act, 1920 (for all other areas). But they have seldom been used due to a dysfunctional judicial system (read: district and high courts).
The debt recovery tribunal (DRT) is the adjudicating authority for individuals and unlimited liability partnership firms under the code. However, an individual can move the debt recovery appellate tribunal (DRAT) contesting the DRT’s order.
At present, there are only 38-odd DRTs and five DRATs functioning in India. Moreover, the DRTs’ track-record in dealing with the recovery of bad loans is poor, and adding insolvency suits would add to the pile of pending cases. The threshold for applicability of the code to individuals and partnerships, at Rs 1,000, is way too low. The need is to give DRTs more teeth to claw back dues. Setting up more benches, raising the remuneration for members of DRTs, making appeals costlier and limiting the number of appeals against rulings would help.
The code allows individuals with small debts to declare insolvency through a fresh-start order. It is an amnesty, and akin to Chapter 7 of the US bankruptcy code where debts are wiped off forever, but only for people with incomes below the median. A resolution professional plays a role in this case as well. But the key is a combination of a functional judicial system and a healthy credit culture.