Fresh Start under IBC
The procedure of a fresh start is codified in Chapter II of Part III of the code. Individuals and partnership businesses can use the fresh start method to discharge their debts which are comparatively small and restart fresh with no liabilities. This procedure is available as an alternative to insolvency and bankruptcy.
Who can Make an Application for a Fresh Start Process?
According to Section 80, IBC 2016, A debtor who is unable to pay his debts and who fulfills the conditions required given in the act can file an application for a fresh start process. It may be made by a debtor either personally or through a Resolution Professional.
Conditions to be fulfilled by the debtor to make an application for Fresh Start
It is provided under section 80(2), IBC, 2016:-
- The gross annual income of the debtor does not exceed 60,000 rupees;
- The aggregate value of the assets of the debtor does not exceed 20,000 rupees;
- The aggregate value of the qualifying debts does not exceed 35,000 rupees;
- He is not an undischarged bankrupt;
- He does not own a dwelling unit, irrespective of whether it is encumbered or not;
- A fresh start process, insolvency resolution process, or bankruptcy process is not subsisting against him; and
- No previous fresh start order under this Chapter II has been made in relation to him in the preceding 12 months of the date of the application for fresh start.
Filing of application for Fresh start Process
If the debtor meets the above-mentioned requirements, he may apply for a fresh start. Now, according to Section 81(3), IBC, 2016, the application for the fresh start process must be completed in the appropriate format and accompanied by the fees set forth in the Code’s attached rules. The application for a fresh start procedure must include the following annexures, which must be accompanied by an affidavit:
- A list of all debts owed by the debtor as of the date of the said application along with details relating to the amount of each debt, interest payable thereon, and the names of the creditors to whom each debt is owed.
- The interest payable on the debts and the rate thereof is stipulated in the contract.
- A list of security held in respect of any of the debts.
- The financial information of the debtor and his immediate family up to 2 years prior to the date of the application.
- The particulars of the debtor’s personal details.
- The reasons for making the application.
- The particulars of any legal proceedings which, to the debtor’s knowledge have been commenced against him.
- The confirmation that no previous fresh start orders under the Chapter II have been made in respect of the qualifying debts of the debtor in the preceding 12 months of the date of the application.
- As per Section 80(2), IBC, 2016, an Interim Moratorium is a period in which all legal proceedings are deemed to have been stayed and creditors cannot initiate any legal action or proceeding against such debts.
- The interim Moratorium will start from the date of filing the application for a fresh start and will be applicable till the date of admission or rejection of the application.
Appointment of resolution professional. (Section 82)
An application under section 80 is filed by the debtor through a Resolution Professional, under Section 82(1)
- The Adjudicating Authority shall direct the Board within 7 days of the date of receipt of the application and shall seek confirmation from the Board that there are no disciplinary proceedings against the resolution professional who has submitted such an application.
- The Board shall communicate to the Adjudicating Authority in writing either the confirmation or rejection of the appointment of the resolution professional who filed an application and nominating another resolution professional suitable for the fresh start process.
An application under section 80 is filed by the debtor himself and not through the Resolution Professional under Section 82(3)
- The Adjudicating Authority shall direct the Board within 7 days of the date of the receipt of an application to nominate a resolution professional for the fresh start process.
- The Board shall nominate a resolution professional within 10 days of receiving the direction issued by the Adjudicating Authority.
- The Adjudicating Authority shall by 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 a fresh start.
Examination of application by resolution professional (Section 83)
- The resolution professional shall examine the application within 10 days of his appointment, and submit a report to the Adjudicating Authority, either recommending acceptance or rejection of the application.
- The report shall contain the details of the amounts mentioned in the application which in the opinion of the resolution professional are qualifying debts and liabilities eligible for discharge.
- The resolution professional may call for such further information or explanation in connection with the application as may be required. The debtor or any other person, as the case may be, shall furnish such information or explanation within 7 days of receipt of the request.
- The resolution professional shall presume that the debtor is unable to pay his debts at the date of the application if:
- In his opinion, the information supplied in the application indicates that the debtor is unable to pay his debts and he has no reason to believe that the information supplied is incorrect or incomplete and
- He has reason to believe that there is no change in the financial circumstances of the debtor since the date of the application enabling the debtor to pay his debts.
- The resolution professional shall reject the application, if in his opinion:
- The debtor does not satisfy the conditions specified 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.
- The resolution professional shall record the reasons for recommending the acceptance or rejection of the application in the report to the Adjudicating Authority and shall give a copy of the report to the debtor.
Admission or Rejection of the application by Adjudicating Authority
- As per Section 84, IBC, 2016, The Adjudicating Authority may within 14 days from the date of submission of the report by the resolution professional, pass an order to either admit or reject the application.
- The order passed accepting the application shall state the amount which has been accepted as qualifying debts by the resolution professional and other amounts eligible for discharge for the purposes of the fresh start order.
- A copy of the order passed by the Adjudicating Authority along with a copy of the application shall be provided to the creditors mentioned in the application within 7 days of the passing of the order.
Effect of admission of application
- As per section 85, IBC, 2016, on the date of admission of the application, the moratorium period shall commence in respect of all the debts.
During the moratorium period
- Any pending legal action or legal proceeding in respect of any debt shall be deemed to have been stayed, and the creditors shall not initiate any legal action or proceedings in respect of any debt.
- Also, During the moratorium period, the debtor shall:
- Not act as a director of any company, or directly or indirectly take part in or be concerned in the promotion, formation, or management of a company;
- Not dispose of or alienate any of his assets.
- Inform his business partners that he is undergoing a fresh start process.
- Be required to inform prior to entering into any financial or commercial transaction of such value as may be notified by the Central Government, either individually or jointly, that he is undergoing a fresh start process.
- Disclose the name under which he enters into business transactions if it is different from the name in the application admitted under section 84;
- Not to travel outside India except with the permission of the Adjudicating Authority.
- The moratorium ceases to have an effect at the end of the period of 180 days beginning with the date of admission unless the order admitting the application is revoked.
Objections by the creditor and their examination by Resolution Professionals.
- As per Section 86, Any creditor mentioned in the order of the Adjudicating Authority to whom a qualifying debt is owed may, within a period of 10 days from the date of receipt of the order object only on the following grounds,
- The inclusion of debt as a qualifying debt or
- The incorrectness of the details of the qualifying debt specified.
- A creditor may file an objection by way of an application to the resolution professional. The resolution professional shall examine the objections and either accept or reject the objections, within 10 days of the date of the application.
- The resolution professional may examine any matter that appears to him to be relevant to the making of a final list of qualifying debts. Once objections are examined the resolution professional shall prepare an amended list of qualifying debts for seeking a discharge order.
Application against decision of Resolution Professional
- As per Section 87, IBC, 2016, The debtor or the creditor who is aggrieved by the action taken by the resolution professional may, within 10 days of such decision, make an application to the Adjudicating Authority challenging such action on any of the following grounds,
- That the resolution professional has not given an opportunity to the debtor or the creditor to make a representation.
- That the resolution professional colluded with the other party in arriving at the decision.
- That the resolution professional has not complied with the requirements of the section.
- The Adjudicating Authority shall decide the application within 14 days of such application, and make an order as it deems fit.
Replacement of Resolution Professional
- As per Section 89, IBC, 2016, where the debtor or the creditor is of the opinion that the resolution professional appointed is required to be replaced, he may apply to the Adjudicating Authority for the replacement of such a resolution professional.
- The Adjudicating Authority shall within 7 days of the receipt of the application make a reference to the Board for replacement of the resolution professional. The Board shall, within 10 days of the receipt of a reference from the Adjudicating Authority, recommend the name of an insolvency professional to the Adjudicating Authority against whom no disciplinary proceedings are pending.
- On being satisfied by the recommendation of the board the adjudicating authority shall appoint the suggested Insolvency professional as resolution professional to continue forward the fresh start process.
Revocation of order admitting the application
- As per Section 91, IBC, 2016, The resolution professional may submit an application to the Adjudicating Authority seeking revocation of its order on the following grounds,
- If due to any change in the financial circumstances of the debtor, the debtor is ineligible for a fresh start process; or
- Non-compliance by the debtor with the restrictions imposed off.
- If the debtor has acted in a mala fide manner and has wilfully failed to comply with the provisions of this Chapter.
- Within 14 days of receiving the application, the Adjudicating Authority may admit or reject the application by order. On the passing of the order admitting the application, the moratorium and the fresh start process shall cease to have an effect.
- As per Section 92, IBC, 2016, At least 7 days before the moratorium period ends, the resolution professional must compile a final list of qualified debts and submit it to the Adjudicating Authority.
- At the end of the moratorium period, the Adjudicating Authority shall issue a discharge order discharging the debtor from the qualifying debts.
- From the date of the application until the date of the discharge order, the Adjudicating Authority shall discharge the debtor from all the penalties, interest including punitive interest, and any other sums owing under any contract in respect of the qualifying debts but not from his pending debts.