Insolvency and Bankruptcy Law: Meaning and Examples

India's institutional and legal system for resolving debt default does not adhere to international standards. The Insolvency and Bankruptcy Code (IBC), 2016, was adopted by the Parliament in order to create and update the legal framework for quick bankruptcy resolution in India, as well as to promote entrepreneurship, improve access to capital, and balance the interests of all stakeholders engaged in a firm.

Further, with its 255 sections and 11 schedules, the 2016 Insolvency and Bankruptcy Code is fairly comprehensive. The legislation aims to consolidate the laws currently found in different pieces of legislation relating to the insolvency of corporations, limited liability entities (including limited liability partnerships and other entities with limited liability), unlimited liability partnerships, and individuals into a single piece of legislation.

What is Insolvency?

Insolvency characterized as the financial state of not being able to fulfil one's financial commitments to creditors, whether it be an individual or a firm. Before starting such activities as establishing up alternative payment channels, any insolvent firm or person is likely to have already established informal settlements with creditors. It's possible that the business's management made mistakes that led to poor cash flow, bad cash management, or a sharp increase in spending, all of which can lead to insolvency.

The National Company Law Tribunal's first bankruptcy case was presented in August 2017. In this instance, Synergy Dooray Automotive Limited filed for insolvency on January 23, 2017, and the order was published on the website of the National Companies Law Assembly on August 14.

What is Bankruptcy?

If a business doesn't give the money back to its customers, it may choose to file for bankruptcy. It declares bankruptcy in order to discharge all debt-related obligations. It is thought to be a proper procedure. However, creditors may seek the court to order that the company's assets be used to settle debts after determining the company's outstanding liabilities. In order to avoid future business operations from being harmed, non-payment of these debts causes some level of disturbance within the organisation. It adheres to the rules of federal courts.

Causes of Insolvency and Bankruptcy

Following are the major causes of insolvency and bankruptcy −

• Inadequate access to reliable financial data − It is impossible to assess the performance of your organisation without a thorough understanding of its financial operations. This issues when begin to arise, it leads problems. In order to prevent insolvency, it is essential to have accurate business and cash flow forecasts in place. By doing so, you'll be better prepared for any potential costs associated with development and expansion because you'll have a clearer idea of where the company is headed in the future.

• Combining personal and corporate accounts without separation − Failure to keep personal and corporate finances separate is another typical mistake that can result in bankruptcy. Blurring the borders between the two puts business owners at danger of either taking too much money from the company for personal use or using personal funds to cover the company's shortfall when cash is running low.

• Cash flow insolvency − In the near future, the company is unable to pay its debts as they become due. A business could eventually go into trouble if it doesn't have enough cash on hand to pay for regular charges like rent and payroll as well as any unforeseen bills.

• Budgeting issues − In the long run, the company has negative assets since its assets exceed its liabilities. A lack of budgeting can further contribute to corporate insolvency, which can result from consistently failing to turn a profit over an extended period of time.

• Market competition − It's possible that your company will eventually lose market share if you ignore your rivals and don't pay attention to what they are doing differently or better than you. Your own clientele may seize up if you don't anticipate market developments and know what your competitors are giving, which could lead to a significant lack of sales and profit.

Insolvency Proceeding

When a company or individual is unable to fulfil their financial commitments and make their debt payments when they are due, an insolvency case is initiated. It might be the result of poor financial management, shifting market trends, more expenses, and decreased income. Insolvency proceedings typically start after less formal arrangements have failed.

Bankruptcy Proceeding

In order to release the debtor from their obligation to creditors, a bankruptcy case must follow a legally prescribed method known as a bankruptcy proceeding. This procedure is carried out through the court system. From the moment a bankruptcy petition is filed until a bankruptcy discharge is granted, the entire process takes place. Reorganization and liquidation are two types of bankruptcy proceeding.

Conclusion

Through numerous changes, many issues have been resolved, but more work still needs to be done. The latest revisions aim to ensure time-bound resolution of bankruptcy cases as well as closing loopholes in the Insolvency and Bankruptcy Code (IBC) that certain promoters had exploited to delay resolution of their failing enterprises. Due to the protection of creditors' rights, the recovery process has significantly improved and is already attracting billions of dollars in investment.

The BRLC drafted the "Insolvency and Bankruptcy Code 2016" in its initial form. In comparison to the previous insolvency legislation, this code contains important modifications and additional provisions. This step has reduced the amount of work that needs to be done by the National Company Law Tribunal, which is the primary body for matters connected to insolvency. In order to promote ease of doing business and detect corporate fraud, India passed the Insolvency and Bankruptcy Code in 2016.

Frequently Asked Question

Q1. What does the insolvency and Bankruptcy Code, 2016 define?

Ans. Parliament has legislated the Insolvency and Bankruptcy Code in 2016. In May 2016, the president gave his approval. Due to a significant build-up of non-performing bank loans and delays in debt settlement, implementation of such rule was imperative. The bankruptcy code provides a one-stop shop for handling insolvencies.

Q2. What is IBBI (insolvency and Bankruptcy Board of India)?

Ans. The Insolvency and Bankruptcy Board of India (IBBI) is a supervisory and regulatory agency established under the IBC. It is in charge of efficiently operationalizing, putting the Insolvency and Bankruptcy Code into practise, and disseminating its provisions.

Q3. What is Operational Debt?

Ans. Operational debt refers the accumulation of inefficiencies, technical debt, and process debt that get accumulated within an organization over time. It arises because of faulty practices and/or failing to maintain or update systems, processes, and technologies necessary for efficient business operations.