Introduction to Bankruptcy and Insolvency law in India
Insolvency is a state of a “Person” or a business that is unable to pay its outstanding payments/debts. And bankruptcy can be defined as the legal process which solves the process of insolvency. There is no difference between insolvency and bankruptcy, rather the next step of insolvency is bankruptcy.
It is described as a situation of insolvency where a person or entity often gets halted in repaying the debt it owes to creditors and officially declares himself or his entity unable to pay outstanding debts. The Law of Bankruptcy and insolvency varies from country to country for e.g. in the United States, it is known with the name of the U.S. Code. Switzerland has Insolvency law of Switzerland & etc.
The bankruptcy law in India a consolidated law has been framed on bankruptcy and known as “The Insolvency and Bankruptcy Code, 2016 (IBC)”.
It’s better to file for Bankruptcy in order to eliminate your debts. Most people in the countries prefer to be Bankrupt in order by canceling their contracts and by surrendering themselves.
Who can file for Bankruptcy?
Not everyone is qualified enough to file for the Bankruptcy, an honest debtor who can’t afford to pay the bills has too much debt and has no real way to repay it, can qualify for the bankruptcy.
The basic intention behind filing for the bankruptcy is to be judged and depends from case to case. Simply, anyone having an intention to defraud its creditors would not be qualified for filing for Bankruptcy.
Basically, the trend has now been changed and the focus has now been shifted to remodel and to restructure the business entities experiencing financial distress in order to revive and rehabilitate them.
The four types of bankruptcy are named for their respective chapters in the United States Bankruptcy Code: –
- Chapter 7– It is a liquidation bankruptcy and also known as business bankruptcy, which means that the trustee sells off all non-exempt assets held by the debtor so that the debts can be repaid to the fullest extent possible. It may be the best choice when the business has no future.
- Chapter 11– It is a kind of Business Reorganization and is the most complex bankruptcy filing and the one that most troubled businesses file. It is a better choice for businesses that may have a future. It is a plan where a company reorganizes and continues in business.
- Chapter 12– It is specifically for farm owners. The debtor still owns and controls his assets and works out a repayment plan with the creditors.
- Chapter 13– It is also known as Personal Bankruptcy and deals only with the individuals. The debtor retains control and ownership of assets. It is a reorganization typically reserved for consumers, though it can be used for sole proprietorships.
Generally, a petition is filed to the court in order to be officially/legally claimed to be bankrupt.
Two types of Petition filed in cases: –
- Voluntary Petition: It is also known as Debtor’s petition and is filed by a debtor who wants to decide for the payments of debts.
- Involuntary Petition: It is also known as Creditor’s petition and is filed by a statutorily prescribed number of creditors whose aggregate sum of claims exceeds a specific amount.
India’s current scenario:
The Insolvency and Bankruptcy Code, 2016 (IBC) was passed by the Parliament on 11th May 2016 and received the assent of President and notified in the Official Gazette on 28th May 2016.
About “IBC” India:
Insolvency and bankruptcy code can be explained as,
“An act to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnerships and individuals in a time bound manner for maximization of the value of assets of such persons.”
Key Features of the IBC are: –
- Consolidation of all existing bankruptcy and insolvency act and bringing out some amendments in the Companies Act also.
- The Code will be having an overriding effect on all other laws relating to Insolvency and Bankruptcy
- Resolving of Insolvencies in a strict time-bound manner
- Clearly defined order of Priority
- Introduction of Qualified insolvency Professional as intermediaries to oversee the process
- Establishment of Board which is known as insolvency and bankruptcy board of India.
- Introduction of NCLT and NCLAT Conclusion: The Law isn’t a law unless and until it is being followed in the true spirit and true letter.
Conclusion: The Law isn’t a law unless and until it is being followed in the true spirit and true letter.
Reviewed and edited by Supriya Dash