What is Bankruptcy?

In layman’s terms, ‘when an individual or an institution is unable to honour its financial obligations or make payment to its creditors, it files for bankruptcy.’ Bankruptcy filing is a legal procedure to free oneself from debt or obligations to creditors. If you file for bankruptcy your debts which are not paid in full are forgiven for the owner.

Bankruptcy filing procedure varies in different countries. In India, if you file for bankruptcy your credit rating goes down, which means you’ll have a hard time getting a new loan if you plan to start fresh in future.

The law which governs bankruptcy and insolvency in India is called as Insolvency and Bankruptcy Code, 2016. The code applies to;

a) Any company incorporated under Companies Act,2013 or under any

previous company law; 

(b) any other company governed by any special Act for the time being in force, except in so far as the said provisions are inconsistent with the provisions of such special Act;

(c) any Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008 ;

(d) such other body incorporated under any law for the time being in force, as the Central Government may, by notification, specify in this behalf; and

(e) partnership firms and individuals. 

It provides a time-bound process to resolve the insolvency. Before 2016 the insolvency resolution in India took 4.3 years on an average. Because of the code now, when a default in repayment occurs, creditors gain control over the debtor’s assets and must take decisions to resolve insolvency within 180 days.

Difference between Bankruptcy and Insolvency:

Insolvency refers to a situation, whereas bankruptcy refers to a legal state. If one is insolvent he is simply not in the state to pay off his debts. Whereas, if you are declared bankrupt, then you have to pay off your debts by either selling off your assets, or by restructuring payment processes with governments’ help. Insolvency is a state of being. Bankruptcy is the conclusion given by law. A bankrupt can become insolvent; but it is not necessary that all insolvents will declare bankruptcy.

Both the situations refer to the state where one is unable to pay off debts.

Co-relation between Bankruptcy, Insolvency and Liquidation:

1. “Bankruptcy” is a legal proceeding involving a person or business that is unable to repay outstanding debts.

2. The bankruptcy process begins with a petition filed by the debtor, or by the creditors.

3. All of the debtor’s assets are measured and evaluated, and then these assets may be used to repay debt.

4. If any person or entity is unable to pay debts, it owes to its creditors, on time or as and when they became due and payable, then such person or entity is regarded as “insolvent”.

5. “Liquidation” is the winding up of a corporation or incorporated entity. Following are the entities that can initiate proceedings that will lead to Liquidation;

  1. The Regulatory Bodies;
  2. The Directors of a Company;
  3. The Shareholders of a Company;
  4. An Unpaid Creditor of a Company

6. Insolvency is common in bankruptcy and liquidation. Not being able to pay debts as and when they became due and payable is the leading cause for Liquidation and is the only way that can cause a natural person to become a bankrupt.

Procedure to resolve insolvency:

Initiation: When a default occurs, the resolution process can be initiated by debtor or the creditor. The insolvency professional administers the process. The insolvency professional provides financial information of the debtor from the information utilities to the creditor and manage the debtor’s assets.  This process lasts for 180 days and any legal action against the debtor is prohibited during this period. 

Decision to resolve insolvency: A committee of the financial creditors who have lent money to the debtor will be formed by the insolvency professional. The creditors committee will take a decision regarding the future of the debt owed to them.  They may choose to revive the debt owed to them by changing the repayment schedule, or sell the assets of the debtor to repay the debts owed.  If a decision is not taken in 180 days, by default the debtor’s assets go into liquidation.

Liquidation: If the debtor goes into liquidation, an insolvency professional administers the liquidation process. Proceeds from the sale of the debtor’s assets are distributed in the following order: i) insolvency resolution costs, including the remuneration to the insolvency professional, ii) secured creditors, whose loans are backed by collateral, dues to workers, other employees, iii) unsecured creditors, iv) dues to government, v) priority shareholders and vi) equity shareholders.

Conclusion:

Because of the Insolvency and Bankruptcy Code, 2016 the bankruptcy procedure on paper is now an easy one. Although no one wants to be on either side of a bankruptcy proceeding, because of the defined timelines, now the same can be bearable. Someone who has found themselves owing more than they own can turn the insolvency around by increasing income, cutting expenses, and working with lenders or credit counsellor’s to work out a plan for repaying their debts to avoid the legal process of bankruptcy. Working your way out of insolvency can be far more preferable than filing for bankruptcy. Bankruptcy should always be one’s last resort.

REFERENCE:

https://economictimes.indiatimes.com/definition/bankruptcy

https://www.prsindia.org/theprsblog/insolvency-and-bankruptcy-code-all-you-need-know

https://taxguru.in/corporate-law/difference-insolvency-bankruptcy.html

https://go.hfcu.org/blog/the-difference-between-bankruptcy-and-insolvency

Aishwarya Says:

I have always been against Glorifying Over Work and therefore, in the year 2021, I have decided to launch this campaign “Balancing Life”and talk about this wrong practice, that we have been following since last few years. I will be talking to and interviewing around 1 lakh people in the coming 2021 and publish their interview regarding their opinion on glamourising Over Work.

If you are interested in participating in the same, do let me know.

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