02 October 2018

A Road Not Yet Taken: Personal Bankruptcy in India

Long ago, during and shortly after my first Fulbright to India, I posted here and here about some serious problems with Indian insolvency/bankruptcy laws as they then existed. In short, before 2017 Indian law provided no effective means by which to wind up the affairs of a failing corporation, pay its creditors with whatever was left, and re-deploy the corporate assets to more efficient uses.

India's ineffective corporate insolvency laws were replaced with a new Insolvency and Bankruptcy Code in 2016. I plan to return to India on another Fulbright in January to investigate how the new law is working with respect to corporate debtors. But what about individuals? Shouldn't there be some means by which they also can get the benefits of a "fresh start" in financial life?

In fact, the Indian Insolvency and Bankruptcy Code does provide for individual bankruptcy. However, unlike statutes passed by Congress in America that take effect whenever the statute provides, laws passed by India's Parliament (Lok Sabha) come into effect only when the Government (India's parliamentary executive) officially "notifies" the law. And no such notification has taken place with respect to the individual bankruptcy provisions of the 2016 law. (Nor, according to folks on the ground in India, does notification seem to on the Government's agenda in the near term.)

For some of the reasons why the Government has not acted you can go here to read a piece by Adam Feibelman, Legal Shock or False Start? The Uncertain Future of India's New Consumer Insolvency and Bankruptcy Regime.  Feibelman starts by observing that, compared with the corporate bankruptcy provisions of the Indian Bankruptcy Code, relatively little regard was paid by the drafters to the details of the consumer side of things. The result is three forms consumer of debt relief (the "fresh start," comparable to below-median-income Chapter 7 in the U.S.), a consumer insolvency proceeding (comparable to Chapter 13), and then bankruptcy (for failures in connection with a consumer insolvency proceeding). It's not that such a three-fold approach is wrong but that the three parts do not fit together in some significant respects.

Second, Feibelman notes that the availability of consumer debt relief under the Indian Code is very narrowly circumscribed for the "fresh start" proceeding. For a consumer insolvency proceeding, on the other hand, creditors are given a predominant role but that bias swings back to the consumer in the event the consumer insolvency proceeding fails. Taken together, these inconsistencies would make uniform administration very difficult which, in turn, may explain why the Government hasn't chosen to notify the consumer provisions of the Code.

Some form of consumer debt relief is necessary in a modern consumer-credit driven economy. Consumer debt is not yet the primary driver of India's consumer economy so the failure to notify the consumer portions of the new law is not a crisis. At least not yet. It will probably take further growth and then a collapse of the Indian consumer economy to bring personal bankruptcy to the fore in India. Until then, the Government should use this hiatus to improve the consumer portions of the Indian Bankruptcy Code.

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