Repayment Plan Termination under Section 118 IBC
Table of Contents
Personal insolvency and bankruptcy are primarily governed by Part III of the Insolvency and Bankruptcy Code, 2016 (IBC). This legal framework provides a structured approach for individuals unable to meet their debt obligations. A key mechanism for resolving individual financial distress without resorting to immediate bankruptcy is the repayment plna, which outlines a manageable strategy for debts to repay creditors over time under the supervision of a resolution professional (RP) and the Adjudicating Authority, the Debt Recovery Tribunal (DRT). This blog post focuses on when, why, and how such a repayment plan can be terminated under section 118 of the IBC.
Overview of Repayment Plans Under IBC
Under section 105 to 117 of the IBC, a repayment plan provides a structured mechanism for individual or partnership debtors to settle their debts while preserving their dignity and avoiding harsh liquidation. The process involves an RP, who assists the debt in formulating a proposal to creditors. The primary objective is to reach an amicable settlement that details the strategy and timeline for debt discharge. This plan must be approved by a majority of creditors and subsequently sanctioned by the DRT. Once approved the repayment plan becomes legally binding on the debtor and all involved creditors.
Statutory Basis – Section 118 of the IBC
Under section 118(1), a repayment plan shall be deemed to have come to an end prematurely if it has not been fully implemented in respect of all persons bound by it within the period as mentioned in the repayment plan. When the repayment plan comes to an end prematurely under this section, the RP submits a report to the DRT stating the receipts and payments made in pursuance of the repayment plan, the reasons for premature end of the repayment plan; and the details of the creditors whose claims have not been fully satisfied, and the DRT passes an order on the basis of this report stating that the repayment plan has not been completely implemented. Further, the debtor or the creditor, whose claims under repayment plan have not been fully satisfied, is entitled to apply for a bankruptcy order under Chapter IV. The DRT forwards a copy of the RP’s report and the order passed to the persons bound by the repayment plan under section 115.
Grounds for Termination of Repayment Plan
The grounds for terminating the repayment plan are as follows:
- Failure to Implement the Repayment Plan: This includes the non-payment of debt, an installment, or any part thereof when due and payable. It also covers persistent default by the debtor or any significant deviation from the agreed repayment schedule.
- Non-Compliance with Terms of the Plan: Grounds include a beach of disclosure obligations, such as failing to provide required financial information for the debtor. Termination can also occur due to a failure to cooperate with the RP or other parties as specified in the plan’s terms.
- Material Irregularity or Fraud: A plan may be terminated if it is discovered that the debtor suppressed assets or income, which impacts the feasibility of the plan. Misrepresentation during the plan’s approval or implementation phase, with the intent to defraud creditors, is a serious grounds for termination.
Who Can Seek Termination?
Parties who can seek termination are the:
- Resolution Professional
- Creditors affected by non-compliance
- The DRT may act on its own satisfaction when it determines the repayment plan has been contravened or the RP has failed to implement it effectively.
Procedure for Termination
- The applicant initiates the resolution process by filing an application before the DRT.
- Before admitting or rejecting an application, the DRT must provide a reasonable opportunity of being heard to the debtor to present their case.
- The DRT relies on the RP’s compliance reports as crucial evidence to assess whether the debtor has failed to implement the terms of the repayment plan, justifying its potential.
Judicial Considerations While Terminating a Repayment Plan
Judicial considerations in terminating a repayment plan include:
- Assessing whether the default was willful or unavoidable, with courts examining the debtor’s conduct and circumstances surrounding the default.
- Proportionality and fairness are central, requiring that the consequences of termination are commensurate with the breach and do not disproportionately harm the debtor.
- Balancing creditor recovery with debtor rehabilitation involves ensuring that the plan’s termination serves the broader bankruptcy objective of allowing a fresh start while still providing reasonable compensation.
Consequences of Termination Under Section 118
When a repayment plan fails or ends prematurely, there are consequences, such as:
- Initiation of Bankruptcy Proceedings: Termination allows the creditor to file an applicant for the initiation of bankruptcy against the personal guarantor. An order by the DRT initiates formal bankruptcy proceedings and leads to the appointment of a bankruptcy trustee to manage the debtor’s estate.
- Impact on Debtor: The debtor loses the protection from enforcement actions that was available during the insolvency process. All of the debtors’ properties and assets automatically vest in the appointed bankruptcy trustee to be managed and realised for the benefit of creditors.
- Impact on Creditors: The individual recovery rights for creditors are reviewed since the stay on proceedings is lifted. Creditors can then participate in the distribution of the bankrupt’s assets as managed by the trustee, in accordance with the hierarchy under the IBC. Read more Undervalued Transactions under IBC
Difference Between Modification and Termination
If the repayment plan is approved by the DRT, it becomes binding on the debtors and creditors as if it were proposed in a meeting. Hence, modification is not permitted once it has been submitted and approved to the DRT, as the Supreme Court has ruled that such plans cannot be withdrawn or altered after approval. However, termination becomes inevitable only when the DRT rejects the repayment plan, at which point the debtors and creditors may file for bankruptcy under Chapter IV. Judicial preference strongly favours the implementation of approved plans over termination, emphasizing the importance of adhering to timelines and preserving the integrity of the insolvency process, with modification not being a viable alternative post-approval.
Practical Issues and Challenges
- There is a lack of mechanisms to effectively monitor and enforce compliance with approved repayment plans.
- The delayed and partial implementation of Part III has resulted in a scarcity of case law and judicial precedent, leading to uncertainty in legal interpretation.
- Challenges also arise in coordinating the processes and jurisdiction between existing DRT and the new framework involving insolvency professionals and the Adjudicating Authority, particularly concerning pending cases and asset management.
Key Legal Principles Emerging
- The repayment plan is conditional, not absolute: This means the plan’s continued operation is dependent on the debtor fulfilling specific requirements rather than being an unconditional discharge of debt.
- Good faith compliance by debtors is essential: This stipulates that debtors must genuinely attempt to meet the terms of their repayment plan, acting honestly and without intent to defraud creditors.
- Termination is a serious step leading to bankruptcy: This underscores the failure to comply with the plan results in severe consequences, often involving the case being dismissed or converted to bankruptcy.
Conclusion
Section 118 of the IBC acts as a safeguard against abuse of repayment plans by deeming a repayment plan to have ended prematurely if not fully implemented within the stipulated period, thereby preventing misuse. It ensures discipline and accountability as it mandates the RP to report on incomplete implementation, reasons for failure, and unsatisfied claims to the DRT. This reinforces that repayment plans are a privilege granted under the law, not an automatic entitlement, and can be revoked if the debtor fails to adhere to its terms.
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