Fresh Start Process

This article studies the functions of resolution professional, adjudicating authority, board, creditors, and debtors. The appointment and the replacement of the resolution professional is also discussed in this article.
Estimated Reading Time: 11 minutes

Introduction

The Part III of the Insolvency and Bankruptcy Code, 2016 deals with the insolvency resolution and bankruptcy for individuals and partnership firms. The Part is further divided into various chapter and each chapter deals with some different concept. The preliminary chapter of the part talks about its applicability and various definitions used in order to discharge functions under this part. This research article will be dealing with the concept of fresh start process under this part. The Part III of the code, applies to matters relating to fresh start, insolvency and bankruptcy of individuals and partnership firms where the amount of the default is not less than one thousand rupees, provided that central government by notification specify the minimum amount of default of higher value which shall not be more than one lakh rupees.[1]

Who can file for fresh start process

The concept of fresh start process is covered under Chapter II of Part III of the Code. The chapter comprises of 14 sections which cover the whole process of filing of fresh start process, how the resolution professional is appointed and how the discharge of order take place under this process.

Conditions for filing application

The application for fresh start process can be filed by the corporate debtor after fulfilling the following conditions[2]:

  1. The gross annual income of the debtor does not exceed 60,000 rupees.
  2. The aggregate value of the assets of the debtor does not exceed 20,000 rupees.
  3. The aggregate value of qualifying debts does not exceed 35,000 rupees.
  4. He is not an undischarged bankrupt.
  5. He does not own a dwelling unit, irrespective of whether it is encumbered or not.
  6. A fresh start process, insolvency resolution process or bankruptcy process is not subsisting against him.
  7. No previous fresh start order under this chapter has been made in relation to him in the preceding 12 months of the date of the application for fresh start.

Qualifying debt

In this whole process one term “qualifying debt” is used on repeat basis. The definition of “qualifying debt” is given under section 79(19) of the Code which states that the qualifying debt can be defined as the amount due by the debtor, this amount also included the interest or any other sum which is owed under any contract by the debtor for the purpose of liquidated sum either immediately or for certain future but the same will not include the following[3] :

  • Excluded debt
  • A debt to the extent it is secured
  • Any debt which has been incurred three months prior to the date of the application for fresh start process.

Therefore, any corporate debtor which fulfils the condition laid down under the section and wants to apply for the fresh start process can file the application through a resolution professional or by himself with respect to the qualifying debts occurred to him.

Filing of applications for fresh start process and its effect

As soon as the application is filed by the corporate debtor under section 80 for the initiation of the fresh start process, the interim moratorium will take place from the date when the application is filed in relation to the debts owed by the corporate debtor. However, the same will cease in effect when the application is admitted or rejected by the adjudicating authority.

Following things will take place when the interim moratorium period is applied[4]:

  • Any legal action or legal proceedings pending in respect of any of its debts shall be deemed to have been stayed.
  • No creditor shall initiate any legal action or proceedings in respect of such debts.

Documents to be attached

When the application is filed by the debtor it shall be filed in the specified manner along with the prescribed fees under the Act. The application should be attached with the following documents which is to be supported by the affidavit[5]:

  • A list of all debts owed by the debtor as on the date of said application along with the details relating to the amount of each debt along with the interest payable and the list of names of the creditors to whom each debt is owed.
  • The interest payable on the debts and rates thereof as stipulated in the contract.
  • A list of security held in respect of any of its debts. 
  • The financial information of the debtor and his immediate family for up to 2yrs prior to the date of application.
  • Debtor’s personal details in the specified manner.
  • Reason for making of the application.
  • Particulars of any legal proceedings which to the debtor’s knowledge has been commenced against him.
  • The confirmation that no previous fresh start order has been made in respect of the qualifying debts of the debtor in preceding 12 months of the date of application.

Therefore, the section laid down that whenever an application of fresh start process has been filed the same should be accompanied with the documents as specified under the clause (4) of the section. These documents will be considered as proof of the debt on the basis of which the debtor as filed the application. The debtor is bound to present all the listed documents failing of which the adjudicating authority has the right to reject the application filed by the debtor or resolution professional on behalf of the debtor.

Appointment of Resolution Professional

The term “resolution professional” can be defined as an insolvency professional appointed to conduct the corporate insolvency resolution process and includes an interim resolution professional.[6]

Whenever the application for fresh start process is filed under Section 80 of the code through the resolution professional, then the adjudicating authority will seek information from the board regarding whether there are any disciplinary proceedings against the resolution professional. This information is seemed after the receipt of the application. The adjudicating authority shall seek such information within the time period of seven days from the receipt of the application.

Role of board

After this, the role of board come into picture. The Board will then provide to the adjudicating authority either the confirmation of the appointment of the resolution professional who filed the application or reject the appointment of such resolution professional and nominate some other RP who will be suitable for the application of fresh start process. This information should be communicated in writing by the board to the adjudicating authority.

In case, where the application is being filed by the debtor himself, then in that case the adjudicating authority shall direct the Board to nominate the RP within 7 days of the date of receipt of an application. The Board then have to nominate RP within 10 days from the receipt of the directions of the adjudicating authority.

When such RP is appointed by Adjudicating Authority and nominated by Board then after the completion of his appointment the adjudicating authority has the duty to provide him the copy of application of the fresh start process.

Examination of application by Resolution Professional

As per section 83 of the Code, the Resolution Professional appointed for the purpose of this process has to examine the report given by him by the adjudicating authority within the time period of ten days from the receipt of the copy of application. The examination of application further includes the submission of the report by the RP to the adjudicating authority which will include his suggestion regarding the admission or rejection of the application.

The report that has to be submitted by the resolution professional must also include the amount of debt which is included in the application and his suggestion whether the amount specified is qualifying debt under the provision of the Code or the liabilities mentioned are eligible to be discharged under the provisions or not.

The RP is empowered to call for further information with regard to the application made for fresh start process. This information can be obtained from the debtor or any other person whom RP thinks fit for the fulfilment of the purpose. The person from whom such information is seemed is bound to furnish the information within the seven days from the receipt of the request from RP.

The resolution professional shall presume that the debtor was unable to pay the debt owed by him if he is of the view that the information furnished to him is true and fair and there is no reason to believe that any temperament with the documents has taken place. Also, the RP is of the view that there is no change in the financial situation of the debtor since the debt occurred.

Rejection of application

However, the RP appointed under the code is also empowered to reject the application if he is of the opinion that[7],

  • The debtor does not satisfy the conditions specified under section 80
  • The debts disclosed in the application by the debtor are not qualifying debts.
  • The debtor has deliberately made a false representation or omission in the application or with respect to the documents or information submitted.

The reasons of rejection or acceptance of the application should be recorded by the RP while submitting its report to the adjudicating authority and the copy of the same should be provided to the debtor.

Admission or Rejection of Application by Adjudicating Authority

The Adjudicating Authority within 14 days from the submission of the report by the resolution professional and thereby pass the order of rejecting or admitting the application made under the provision of the code. In case where the order has been passed regarding the acceptance of the application, then in that case, the adjudicating authority should specify the amount which has been considered as the qualifying debts by the resolution professional and various other amount which are eligible to be discharged under Section 92 of the Code.

The adjudicating authority has to provide the copy of the application and order passed by him to the creditors of the debtor within 2 days of the passing of the order.

When the application is being admitted by the adjudicating authority the moratorium period shall commence. The date of commencement of moratorium period will depend upon the date of admission of the application. Certain restrictions have to be imposed during the moratorium period. These restrictions should be followed strictly by the debtor. All the legal proceedings against the debtor will remain stayed during this period. The moratorium period will cease to be in effect after the end of 188 days beginning form the date of admission of the application.

Objections by creditors and their examination

Any creditor to whom the copy of order is being served by the adjudicating authority and the same is having his name with respect to the qualifying debt owned against him, has to object only on the grounds mentioned under section 86 of the Code. These objections have to be made within a period of ten days from the date of receipt of the order. The grounds on which the creditor is eligible to raise objections are as follows:[8]

  • Inclusion of debt as a qualifying debt
  • Incorrectness of the details of the qualifying debt specified in order under section 84 of the code.

These objections by the creditor can be made by way of an application to the resolution professional along with such documents which will support the objections raised by the creditor. The resolution professional is empowered to examine the objections raised by the creditor and within 10 days of the receipt of such application either accept the objections or reject the same.

On the basis of the examination conducted by the resolution professional, he must prepare the amended list of the qualifying debts for the purpose of discharge order and also has to make an application to adjudicating authority under the provision of Section 90 (Directions for compliance or restrictions, etc) or is eligible to take any other step in relation to the debtor.

Application against decision of resolution professional

Section 87 of the Code laid down the concept of filing of the application against the decision of the resolution professional. According to this provision, the debtor or the creditor whosoever is aggrieved by the decision of the resolution professional may make an application to the Adjudicating Authority within 10 days when such decision is passed. The grounds on which such application can be made are as follows:[9]

  • The resolution professional has not given an opportunity to the debtor or the creditor in order to make representations.
  • Resolution professional has not complied with the requirements as mentioned under Section 86 (Objections by creditors and their examination by resolution professional)
  • The resolution professional colluded with the other party in arriving at the decision.

The adjudicating authority then decide the application within 14days of the receipt of the application against the decision of resolution professional. If the application is allowed by the adjudicating authority the same shall be forwarded to the Board who may take the appropriate actions against the resolution professional.

Replacement of Resolution Professional

The power of replacement of the resolution professional is vested with the creditor or debtor under the code and the procedure for the same has been covered under Section 89 of Chapter II Part III of IBC. As per the provision, if the debtor or the creditor is of the view that the resolution professional is unable to discharge his function then in that case, they can file an application for the replacement of the resolution professional. This application is to be filed with the Adjudicating Authority.

The adjudicating authority shall within the time period of seven days of the receipt of the application make the reference of the same to the Board. The Board then within the period of 10 days recommend the name of the insolvency professional to the adjudicating authority, provided that no disciplinary proceedings should be there against such insolvency professional. The adjudicating authority then appoint such insolvency professional for the purpose of discharging his functions towards the fresh start process.

The adjudicating authority is empowered to direct the new appointed resolution professional by sharing all the information with him in respect of the fresh start process and also it is the duty of the adjudicating authority to cooperate with the new resolution professional as and when required by him.

Discharge Order

Section 92 of the Code laid down the concept of discharge order by the resolution professional. As per the provision, the resolution professional has to prepare a final list of qualifying debts and submit the same to the adjudicating authority at least seven days before the moratorium period ends. The discharge order will be passed by the adjudicating authority after the end of moratorium period. The adjudicating authority shall discharge the debtor from the following liabilities[10]:

  • Penalties in respect of the qualifying debt from the date of application till the date of discharge order.
  • Interest including penal interest in respect of the qualifying debts form the date of application till the date of discharge order.
  • Any other sums owed under any contract in respect of the qualifying debt from the date of application till the date of discharge order.

However, the discharge order will not discharge the debtor from any debt other than those mentioned in the section itself. The discharge order then will be forwarded to the Board for the purpose of recording of the same in register.

Conclusion

The provision laid down for the purpose of fresh start process to be initiated under the code are clear in nature. The code itself bifurcates the functions of resolution professional, adjudicating authority, board, creditors, and debtors. The appointment and the replacement of the resolution professional is easy to understand. One can find the solution of their query with respect to this chapter can find their solutions within the provisions of chapter itself.


[1] Section 78 of Insolvency and Bankruptcy Code 2016

[2] Section 80(2) of Insolvency and Bankruptcy Code 2016

[3] Section 79(19) of Insolvency and Bankruptcy Code 2016

[4] Section 81(2) of Insolvency and Bankruptcy Code 2016

[5] Section 81(4) of Insolvency and Bankruptcy Code 2016

[6] Section 3(27) of IBC 2016

[7] Section 83(6) of IBC 2016

[8] Section 86(1) of IBC 2016

[9] Section 87(1) of IBC 2016

[10] Section 92 (3) of IBC, 2016

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