Overview Of Insolvency Laws In India

Insolvency Laws- As we all know, nowadays, insolvency has become quite common among individuals, corporate houses, firms, and even multi-national companies.

Insolvency is a state when an individual or company fails to meet their financial obligations which is to pay their debts to the creditors and money lenders.

When a person becomes insolvent, it is called as ‘Bankruptcy’. Bankruptcy is not exactly same as insolvency. ‘Insolvency’ is a financial distress whereas ‘Bankruptcy’ is a legal proceeding which has different procedures than insolvency.[1]

An individual becomes insolvent because of their poor budgeting, finance management, unemployment, failure of business, personal problems (illness, divorce) or overconsumption, but there is a much preferred term for an individual’s insolvency which is “Bankruptcy” because bankruptcy only refers to personal debts and would be inappropriate if used for company debt.[2]

Insolvency occurs when a company is indebted to creditors or cannot pay its bills when due. But being insolvent doesn’t really mean that it’s the end of the company. A firm suffering from poor finance management or a temporary economic downturn can still be turned around.  There are laws regarding insolvency and there are also other options for debt relief, company rescue and turnaround.

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1 Insolvency Laws In India

1.1 According to this code, steps to resolve insolvency are as follows:-

1.2 Decision to resolve insolvency:

2 Conclusion

2.1 Related

Insolvency Laws In India

The Insolvency And Bankruptcy Code, 2016

This code applies to:

1. Any company incorporated under the Companies Act, 2013 or under any previous company law;
2. Any Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008.
3. Partnership firms and individuals, in relation to their insolvency, liquidation, voluntary liquidation or bankruptcy[3]
4. It provides a time-bound process to resolve insolvency.
5. It also provides immunity to the debtors from resolution claims of creditors.

According to this code, steps to resolve insolvency are as follows:-

• Initiation: When a default occurs, the resolution process should be initiated by the debtor or creditor. A financial creditor either by itself or jointly with other financial creditors may file an application for initiating corporate insolvency resolution process against a corporate debtor. The resolution process would be administered by the insolvency professional. An appropriate decision will be taken by the creditor’s committee in regard to the outstanding debt owe to them. The insolvency professional provides financial information of the debtor from the “information utilities” to the creditor in order to manage the debtor’s assets. The creditor’s committee must take a decision to resolve insolvency within 180 days, as it is a time-bound process.

Decision to resolve insolvency:

• The insolvency professional would form a committee consisting of the financial creditors who lent money to the debtor. The committee will take a decision regarding the outstanding debt owed to them. They may choose to resuscitate the debt owed to them by changing the repayment schedule, or sell the assets of the debtor to repay the debts owed to them.  If a decision is not take in the given time period then the debtor’s assets go into liquidation.[4]
• Liquidation: The insolvency professional administers the liquidation process, if the debtor’s assets goes into liquidation. The sales of the debtor’s assets will proceed in the following manner:
  • Insolvency resolution costs, including the remuneration to the insolvency professional,
  • Secured creditors, whose loans are back by collateral, dues to workers, other employees,
  • Unsecured creditors,
  • Dues to government,
  • Priority shareholders and
  • Equity shareholders

In 2017, Indian government had done several amendments in the insolvency and bankruptcy code i.e. expanding the scope of insolvency, eligibility criteria of the resolution applicants in order to strengthen the insolvency resolution process.

In 2019 amendment, the government focuses on the promotion of entrepreneurship, amendment of laws relating to reorganization and insolvency resolutions of corporate persons, firms, and individuals, balancing the interests of all shareholders, steps to decrease the mistreatment by certain classes of creditors, etc.

Conclusion

The code should be more clear in order of priority to distribute assets during liquidation;

1. Secured creditors will receive their entire outstanding amount, rather than up to their collateral value, 
2. Unsecured creditors have priority over trade creditors, and
3. Government dues will be repaid after unsecure creditors.

In a limit span of time, the Code was build and establish its jurisprudence. However, the code expected changes to stay aware of the insolvency over the world and to enable the Indian economy to succeed with territorial boundaries.  The Code appeared to be somewhat over-driven. The smooth functioning of the Code depends on the functioning of new entities such as insolvency professionals, insolvency professional agencies and information utilities.

The changes proposed in the 2017 & 2019 amendment will largely influence the insolvency professionals associated with it but the space in the propose amendments will be find in the coming time. 

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[1] CFI, insolvency, corporate finance institute education inc. (February 03, 2021, 11:02 AM), https://corporatefinanceinstitute.com/resources/knowledge/finance/insolvency/

[2] Simon renshaw, what is insolvency?, COMPANY DEBT, (February 03, 2021, 11:48 AM), https://www.companydebt.com/faqs/what-is-insolvency/

[3] The Insolvency And Bankruptcy Code, 2016

[4] Aravind gay, the insolvency and bankruptcy code: all you need to know, prsindia.org, (February 03, 2021, 02: 00 pm), https://www.prsindia.org/theprsblog/insolvency-and-bankruptcy-code-all-you-need-know