Bankruptcy Law: Definition and Meaning


The parliament has passed a bill and enacted it as the Insolvency and Bankruptcy Code (IBC) in 2016 to regulate the misleading financial transactions and fasten the dispute resolving service related to bank transactions. The nation is currently in a condition of urgency of such law, as there are thousands of such transactions, which are non-functional. India currently holds the 136th position out of 189 countries in the World Bank's Index, surpassing 63 other nations. In India, it typically takes 4.5 years to resolve disputes, which is longer than it is in the majority of other developing countries worldwide. But IBC have legislated to resolve the issue of delayed justice.

What do the Bankruptcy Laws Define?

Bankruptcy law in India, primarily, governed by the Insolvency and Bankruptcy Code (IBC), which was passed in 2016. The IBC is a comprehensive legislation that covers wide range of topics including the issues of financial transactions and a time-bound process for resolution of insolvency and bankruptcy cases. The IBC has replaced several earlier laws that dealt with these issues.

The Indian bankruptcy code attempts to strengthen the existing framework by establishing a common law for matters relating to both bankruptcy and financial distress. It focuses on a deadline-driven strategy for resolving conflict between businesses and people. In some ways, the law has made things better.

Likewise, the IBC covers two main processes especially in reference to resolve insolvency disputes −

Corporate Insolvency Resolution Process (CIRP)

The CIRP can be initiated when someone defaults, and subsequently, the creditors or the debtor can file an application for initiating the process. The CIRP, primarily, involves the appointment of an insolvency professional who takes control of the company's affairs, and a committee of creditors who make decisions in reference to the company's future. So, the objective of the CIRP is to find a way out plan, which could ensure the company's viability and pay off its debts

Liquidation

The liquidation process, on the other hand, involves first selling the assets of the company and then distributing them among the creditors. For all these, the IBC provides a time-bound process (i.e. both the CIRP and liquidation), which means, it ensures a quick and efficient resolution of insolvency cases.

Advantages of Bankruptcy Law

The advantages are as follows −

  • With its time-bound resolution, it is successful in reducing the rate of insolvency.

  • It increases the industry's access to resources.

  • It ensures the timely and proper payment of debt to creditors.

  • It helps by encouraging up-and-coming business people.

  • It eliminates a number of outdated Indian laws on bankruptcy and insolvency.

Hardships

Consumer bankruptcy attorneys claim that any legislation that takes authority away from debtors and transfers it to contributors must overcome legal obstacles.

Multiple sections of the code have been contested by borrowers in court and before judges sitting on benches. Due to various difficulties encountered during the National Company Law Tribunal's operation, several benchmark cases assigned to the IBC division were stopped.

Order of Process Under the IBC

A lender or borrower must speak with the National Company Law Tribunal (NCLT) on day 1 to begin the insolvency procedure. The body determines whether the petition is approved or rejected in full. Typically, it takes 14 days to complete the process. Once the case has been accepted, all of the donors and lenders will establish a board and choose an IRP, who will oversee the borrower's company while this is happening. The elected officials must decide on a suitable debt restructuring plan that must be followed in the case within 180 days. Lenders are permitted an additional 90 days to disclose the final resolution policy in this procedure. The nominated staff will continue the debt restructuring policy if the donors approve (by random vote).

Consequences

It aids in overcoming circumstances where banks and lenders must keep problematic assets for an extended amount of time, negatively damaging their well-being! The ease of doing business and improved facilities have an impact on the country's transaction process. The economy and GDP will be impacted by more transactions to some extent. There would be no uncertainty or delays because the workers would receive their pay on time. The nominated staff will continue the debt restructuring policy if the donors approve (by random vote).

Conclusion

Owners and bidders of real estate would be considered commercial creditors and have the right to be named to the Committee of Creditors (CoC). The deletion of promoters and bondsmen of various MSMEs is prohibited. Additionally, it enables the Center to grant additional benefits or make modifications in relation to the relevant industry. A business may file for bankruptcy as long as it has the backing of at least 3/4 of the stakeholders and seeks stockholder approval.

Moreover, the IBC is legislated with the purpose to improve the ease of doing business in India, as it provides a comprehensive legal framework for resolving insolvency cases in a timely and efficient manner.

Frequently Asked Questions

Q1. When undergoing a consumer proposal, is bankruptcy still admissible?

Ans. They'll still anticipate getting a portion of what they would get if you finished filing for bankruptcy. The problem is that with a proposal, you can either keep any inherited assets or extend the terms for paying back surplus revenue.

Q2. What happens in India if someone files for bankruptcy?

Ans. Owners are absolved of any debts that are not fully paid to creditors. The process for filing for bankruptcy differs by nation. If you ask for bankruptcy in India, it would likely negatively affect your credit rating, making it more difficult for you to obtain a new loan if you want to start over.

Q3. What laws apply to bankruptcy in India?

Ans. An Indian law known as the Insolvency and Bankruptcy Code, 2016 (IBC) establishes a unified framework for the administration of insolvency and bankruptcy proceedings for businesses, partnership entities, and private individuals.

Q4. What does IBC Section 35 entail?

Ans. With the proviso that the liquidator shall not sell the real estate, personal property, or actionable claims of the corporate debtor in liquidation to any individual who is not qualified to be a resolution applicant.

Q5. Which three things are prohibited from filing for bankruptcy?

Ans. Not all debt can be discharged through bankruptcy, regardless of the type of bankruptcy that is requested. You won't be able to discharge certain forms of debt in bankruptcy, including taxes, alimony, child support, spousal support, and government-funded or backed school loans.

Q6. Is declaring bankruptcy preferable to paying off debt?

Ans. Even though debt settlement can take longer than bankruptcy, it still damages your credit. Bankruptcy may be your best (or only) option if you require emergency assistance or are unable to make your monthly payments.

Q7. What distinguishes insolvency from bankruptcy?

Ans. A person who is unable to make timely debt payments is insolvent. When a person declares they are unable to repay their debts to creditors, bankruptcy is a legal procedure that takes place.

Q8. What are the major reasons for bankruptcy?

Ans. Major reasons for bankruptcy are −

Financial mismanagement involving college debts, automobile or property purchases, etc., income decline or job loss unexpected emergencies, such as a car breaking down or severe property damage.

Updated on: 05-Apr-2023

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