Anticipating the Function and Impact of India's New Personal Insolvency and Bankruptcy Regime

Abstract

In May of last year, India adopted a regime for personal insolvencies and bankruptcies as part of a comprehensive new Insolvency and Bankruptcy Code. The Code was drafted and enacted in a very short amount of time, and the personal insolvency and bankruptcy provisions received considerably less attention during the lawmaking process than the provisions that relate to corporate debtors. Therefore, many fundamental questions about the purpose and likely impact of these provisions remain largely unaddressed. The Code’s provisions for individual debtors have not yet gone into force, and the regulatory agency charged with implementing it has recently constituted an advisory committee, which has drafted some proposed regulations and rules and will presumably advise the agency on potential reforms. The advisory group’s project of review and counsel will inevitably spur more public discussion and debate about the purpose and function of personal insolvency and bankruptcy law in India. This Article contributes to that discussion by describing India’s new personal insolvency and bankruptcy regime in some detail; analyzing the likely goals of policymakers who drafted and enacted the regime; assessing the design of the regime in light of those goals; and anticipating the function and impact of the law as enacted. It observes that the regime represents something of a legal shock, providing heretofore unavailable tools to both creditors and debtors in India. On paper, it significantly expands the availability of relief and protection available to individuals and households. It has the potential to transform aspects of Indian society related to consumer and household borrowing, especially regarding the stigma associated with financial distress and debt relief. Yet, there is a significant possibility that the regime will, at least initially, function primarily as a creditor’s remedy and provide suboptimal insurance for individual and household debtors. If so, this would reduce the regime’s utility in helping individual debtors – including entrepreneurs – recover from financial distress and would exacerbate some of the social costs of consumer over-indebtedness. It could also distort the development of consumer financial markets in India by promoting the expansion of lending without effectively insuring against systemic household over-indebtedness.