The Non-Implementation of Section 243 of the Insolvency and Bankruptcy Code: Legal Implications and Current Status

Introduction

The Insolvency and Bankruptcy Code of 2016 marked a watershed moment in India’s legal framework for addressing corporate and individual insolvency. Enacted to consolidate fragmented insolvency laws and establish a time-bound resolution mechanism, the Code aimed to replace archaic colonial-era legislation with modern procedures suited to India’s economic landscape. However, despite the Insolvency and Bankruptcy Code receiving presidential assent in 2016 and several provisions being progressively notified, Section 243 which provides for the repeal of the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920 remains unnotified. This anomaly has created a unique legal situation where personal insolvency continues to be governed by century-old laws while corporate insolvency operates under a modern framework.

The rationale behind introducing the Code was to address the inadequacies of existing legislation, particularly the Sick Industrial Companies (Special Provisions) Act, 1985, which lacked effective market mechanisms for timely stress resolution. The Code established an institutionalized creditor-in-control mechanism for revival and insolvency resolution of corporate persons, partnership firms, and individuals within defined time limits. However, the incomplete implementation of provisions relating to individual insolvency under Part III of the Code has left stakeholders navigating between old and new legal regimes.

Historical Context and Legislative Framework

Colonial Era Insolvency Legislation

The Presidency Towns Insolvency Act of 1909 was enacted to govern insolvency proceedings for individuals, partnerships, and associations within the presidency towns of Bombay, Calcutta, and Madras[1]. This legislation provided the High Courts in these presidency towns exclusive jurisdiction over insolvency matters. The Act established a framework for both voluntary petitions by debtors and involuntary petitions by creditors, subject to specified conditions and thresholds.

The Provincial Insolvency Act of 1920 extended similar provisions to areas outside the presidency towns, bringing insolvency law to the rest of British India[2]. This Act empowered District Courts to handle individual and partnership firm insolvencies in their respective jurisdictions. Both statutes shared similar substantive provisions regarding acts of insolvency, discharge procedures, and distribution of assets, differing primarily in their territorial application and adjudicating authorities.

Despite recognizing the artificiality of maintaining separate legislation for different parts of the country, these Acts continued to govern personal insolvency for over a century. The distinction between presidency towns and mofussil areas, justified in colonial times due to commercial development disparities, lost relevance as India’s economy evolved post-independence.

Law Commission Recommendations

In February 1964, the Law Commission of India presented its Twenty-Sixth Report on Insolvency Laws, recommending the consolidation of the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920 into a single unified code[3]. The Commission noted that maintaining separate legislation for presidency towns and other areas was no longer justified given the uniform progress of commerce and industry across India. The report observed that except for procedural variations, the substantive law under both enactments was largely identical, making consolidation both practical and desirable.

However, this recommendation remained unimplemented for decades. The divergent insolvency regimes continued to operate despite their colonial origins and the practical difficulties they posed for stakeholders navigating between different legal frameworks depending on geographical location.

Section 243 of the Insolvency and Bankruptcy Code

Statutory Provisions

Section 243 of the Insolvency and Bankruptcy Code, 2016 is titled “Repeal of certain enactments and savings” and consists of two substantive provisions. Sub-section (1) of Section 243 states: “The Presidency Towns Insolvency Act, 1909 (3 of 1909) and the Provincial Insolvency Act, 1920 (5 of 1920) are hereby repealed.”[4]

Sub-section (2) contains important savings provisions which state that notwithstanding the repeal, all proceedings pending under the repealed Acts immediately before the commencement of the Code shall continue to be governed under those Acts and be heard and disposed of by the concerned courts or tribunals as if the Acts had not been repealed. Additionally, any order, rule, notification, or other instrument made under the repealed enactments shall continue to have effect to the extent not inconsistent with the Code.

Interplay with Part III of the Code

Part III of the Insolvency and Bankruptcy Code deals specifically with insolvency resolution and bankruptcy for individuals and partnership firms. It consists of seven chapters covering fresh start processes, insolvency resolution processes, bankruptcy orders, administration and distribution of estates, adjudicating authorities, and offences and penalties. The framework established under Part III was intended to provide a modern, time-bound mechanism for individual insolvency resolution, replacing the colonial-era legislation.

However, except for provisions relating to personal guarantors to corporate debtors which were notified in November 2019, Part III of the Code remains largely unnotified. This creates a legal limbo where Section 243 technically repeals the old Acts, but the alternative framework intended to replace them is not yet operational.

The Notification Issue and Its Implications

Partial Implementation Strategy

The Insolvency and Bankruptcy Code adopted a phased implementation approach, with different provisions being notified at different times based on readiness and priority. Section 1(3) of the Code explicitly provided for this staged approach, allowing the Central Government to appoint different dates for different provisions to come into force. While provisions relating to corporate insolvency were notified relatively quickly, individual insolvency provisions remained dormant.

In November 2019, a significant but limited notification brought certain provisions of Part III into force, but only insofar as they related to personal guarantors to corporate debtors. This notification covered Sections 94 to 187 of the Code along with relevant definitional provisions, establishing a framework for creditors to pursue personal guarantors of corporate debtors through insolvency proceedings before the National Company Law Tribunal.

Government Clarifications

The Government of India has issued multiple clarifications regarding the status of Section 243 and individual insolvency provisions. A press release dated August 28, 2017, from the Ministry of Finance explicitly cautioned that Section 243, which provides for the repeal of the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920, had not been notified[5]. The press release further clarified that provisions relating to insolvency resolution and bankruptcy for individuals and partnerships contained in Part III of the Code were yet to be notified.

Consequently, stakeholders intending to pursue insolvency cases against individuals were advised to approach the appropriate authority or court under the existing enactments rather than approaching Debt Recovery Tribunals under the Code. This guidance effectively confirmed the continued operation of century-old legislation for individual insolvency matters.

Judicial Interpretation and Key Precedents

State Bank of India v. V. Ramakrishnan

The Supreme Court addressed crucial questions regarding the application of insolvency provisions to personal guarantors in the landmark case of State Bank of India v. V. Ramakrishnan, decided on August 14, 2018[6]. The central issue was whether the moratorium provisions under Section 14 of the Code, which apply during corporate insolvency resolution processes, extended to personal guarantors of corporate debtors.

The Court emphatically held that Section 14 does not apply to personal guarantors. In reaching this conclusion, the Supreme Court noted that Part III of the Code had not been brought into force, and neither had Section 243 which repeals the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920. The Court observed that individual personal guarantors would continue to be proceeded against under these colonial-era Acts rather than under the Code. The judgment referenced the government’s press release of August 28, 2017, acknowledging the official position that Section 243 remained unnotified.

The Court further reasoned that Section 14 of the Code refers specifically to corporate debtors and their assets, with no mention of personal guarantors. The existence of separate moratorium provisions for individuals under Sections 96 and 101 of the Code, which had not been notified, indicated legislative intent to treat corporate and personal insolvency differently. This decision provided much-needed clarity but also highlighted the continued relevance of old insolvency laws for individuals.

Lalit Kumar Jain v. Union of India

The constitutional validity of provisions relating to personal guarantors came before the Supreme Court in Lalit Kumar Jain v. Union of India, decided on May 21, 2021[7]. This case arose from multiple challenges to the notification dated November 15, 2019, which selectively brought into force Part III provisions only for personal guarantors to corporate debtors.

Petitioners argued that the selective notification creating a framework for personal guarantors while leaving other individuals without similar provisions was discriminatory and violated Article 14 of the Constitution. They contended that Section 243 should have been notified to repeal the old Acts before introducing new provisions for any category of individuals. The argument was that having parallel regimes where personal guarantors fell under the Code while other individuals remained under colonial-era laws created an illogical and contradictory legal framework.

The Supreme Court rejected these contentions and upheld the notification. The Court recognized the legislative wisdom in adopting a phased approach to implementation, noting that Parliament had consciously chosen to segregate personal guarantors as a distinct category through the 2018 Amendment Act. The judgment emphasized that there was no constitutional compulsion to implement the Code’s provisions for all categories of individuals simultaneously. The Court reasoned that personal guarantors had an inherent connection to corporate debtors, justifying their separate treatment and priority in notification.

Significantly, the Court acknowledged that Section 243 had not been notified but found this did not invalidate the selective implementation. The judgment stated that Section 238 of the Code, which gives it an overriding effect over other laws, provided sufficient legal basis for the Code’s provisions to operate even without formally repealing the old Acts. This interpretation allowed for the coexistence of multiple insolvency regimes, though the Court did not extensively address the practical complications this might create.

The Court also clarified that approval of a resolution plan under the Code does not ipso facto discharge a personal guarantor from liabilities under the contract of guarantee. This ruling emphasized the independent nature of guarantee obligations and the creditor’s right to proceed simultaneously against both the corporate debtor and personal guarantors.

Current Legal Framework and Practical Challenges

Dual Regime Operation

The present situation creates a dual regime for insolvency proceedings. Corporate insolvency is governed entirely by the Insolvency and Bankruptcy Code through the National Company Law Tribunal framework, providing for time-bound resolution, creditor control, and liquidation as a last resort. In contrast, personal insolvency for most individuals continues under the Presidency Towns Insolvency Act, 1909 or the Provincial Insolvency Act, 1920, depending on location.

Personal guarantors to corporate debtors occupy a unique middle ground. While they remain individuals, the November 2019 notification brought them under Part III of the Code, making them subject to insolvency proceedings before the National Company Law Tribunal. This creates a situation where the same individual might be treated under different legal frameworks depending on whether they provided a guarantee to a corporate debtor or incurred debt in their personal capacity.

Institutional Preparedness

One significant factor contributing to the non-notification of individual insolvency provisions is institutional preparedness. Unlike the National Company Law Tribunal, which was strengthened to handle corporate insolvency cases, Debt Recovery Tribunals designated as adjudicating authorities for individual insolvency under Section 179 of the Code require substantial capacity building. The infrastructure, trained personnel, and procedural frameworks necessary for efficient handling of individual insolvency cases across India remain works in progress.

Officials involved in implementing the Code have indicated that while corporate insolvency provisions do not create direct social impact, individual bankruptcy provisions have immediate social ramifications. The potential for widespread use of personal insolvency mechanisms, particularly in a country with India’s population and economic diversity, necessitates careful preparation to prevent misuse and ensure fair outcomes for all stakeholders.

Policy Considerations and Future Outlook

Social and Economic Implications

The reluctance to notify Section 243 and fully implement individual insolvency provisions stems partly from concerns about social consequences. Personal bankruptcy carries significant stigma in Indian society, and creating an accessible mechanism for individuals to declare insolvency could have far-reaching social implications. There are concerns about potential misuse by unscrupulous debtors seeking to evade legitimate obligations, as well as the impact on family structures and social relationships when individuals undergo insolvency proceedings.

From an economic perspective, a robust individual insolvency framework could promote entrepreneurship by providing genuine risk-takers with a second chance after business failure. However, it could also affect credit markets, potentially making lenders more cautious about extending personal loans if borrowers have easy access to bankruptcy protection. Balancing debtor rehabilitation with creditor rights remains a delicate policy challenge.

Steps Toward Full Implementation

The Insolvency and Bankruptcy Board of India and relevant government ministries continue working toward creating the regulatory framework necessary for full implementation of individual insolvency provisions. This includes drafting detailed rules and regulations, building institutional capacity in Debt Recovery Tribunals, training insolvency professionals, and creating information utilities capable of handling personal financial data.

International best practices are being studied to design a framework suited to Indian conditions. Countries with mature bankruptcy regimes offer valuable lessons about balancing fresh start opportunities for honest debtors with preventing fraud and protecting creditor interests. The challenge lies in adapting these lessons to India’s unique social, economic, and legal context.

Conclusion

Section 243 of the Insolvency and Bankruptcy Code, though enacted in 2016, remains unnotified, allowing colonial-era insolvency laws to continue governing personal bankruptcy for most individuals. This situation reflects the complexity of implementing sweeping legal reforms in a diverse and populous nation like India. While the partial notification for personal guarantors to corporate debtors represents progress, complete implementation of the Code’s vision for individual insolvency requires further institutional development and policy refinement.

The judicial interpretation by the Supreme Court, particularly in the Lalit Kumar Jain case, has provided constitutional validation for the phased approach while acknowledging the anomalies created by incomplete implementation. However, the continued reliance on century-old legislation for personal insolvency matters highlights the urgent need for comprehensive reform. Until Section 243 is notified and Part III of the Code becomes fully operational, India’s insolvency regime will remain fragmented, with modern provisions for corporate debtors coexisting alongside antiquated frameworks for individuals.

The eventual notification of Section 243 of the Insolvency and Bankruptcy Code and complete implementation of individual insolvency provisions will mark an important milestone in India’s economic legal infrastructure. When that happens, India will finally have the unified, modern insolvency framework envisioned by lawmakers, capable of addressing insolvency for all categories of debtors in a fair, efficient, and time-bound manner.

References

[1] Presidency-Towns Insolvency Act, 1909 (Act No. 3 of 1909). Available at: https://www.indiacode.nic.in/handle/123456789/19722 

[2] Provincial Insolvency Act, 1920 (Act No. 5 of 1920). Available at: https://www.indiacode.nic.in/bitstream/123456789/19723/1/a1920-05.pdf 

[3] Law Commission of India. (1964). Twenty-Sixth Report on Insolvency Laws. Available at: https://indiankanoon.org/doc/75676088/ 

[4] Insolvency and Bankruptcy Code, 2016 (Act No. 31 of 2016), Section 243. Available at: https://www.indiacode.nic.in/bitstream/123456789/15479/1/the_insolvency_and_bankruptcy_code,_2016.pdf 

[5] State Bank of India v. V. Ramakrishnan & Anr., Civil Appeal No. 3595 of 2018, Supreme Court of India. Available at: https://indiankanoon.org/doc/163084985/ 

[6] Lalit Kumar Jain v. Union of India & Ors., Transfer Case (Civil) No. 245/2020, Supreme Court of India. Available at: https://ibclaw.in/case-name/lalit-kumar-jain-vs-union-of-india-ors/ 

[7] Supreme Court of India. (2023). Decision on Personal Guarantors, 2023 INSC 1018. Available at: https://api.sci.gov.in/supremecourt/2021/24405/24405_2021_1_6_48185_Judgement_09-Nov-2023.pdf 

[8] Insolvency and Bankruptcy Board of India. Legal Framework and Notifications. Available at: https://ibbi.gov.in/en/legal-framework/notifications 

[9] Ministry of Corporate Affairs. (2019). Notification No. S.O. 4126(E) dated November 15, 2019. Available at: https://www.scconline.com/blog/post/2021/05/23/insolvency-and-bankruptcy-code-nothing-wrong-with-ibc-notification-treating-personal-guarantors-differently-from-other-categories-of-individuals-supreme-court/ 

Authorized and Published by Sneh Purohit