Insolvency is a state or condition of a person who is unable to pay his debts. Bankruptcy on the other hand is a situation whereby a court of competent jurisdiction has declared a person or an entity insolvent, having passed appropriate orders to resolve it and protect the rights of the creditors.
At present, the laws governing insolvency and bankruptcy in India are not consolidated and are at time overlapping, involving several institutions such as the Company Law Board, Debt Recovery Tribunal, high courts, etc. A coherent and unified structure under a consolidated legal framework to deal with insolvency and bankruptcy in India has long been overdue.
Insolvency & Bankruptcy Code
The Insolvency and Bankruptcy Code, 2016 (Code), consolidates and amends a slew of legislations governing the legal framework relating to reorganisation and insolvency resolution in a time-bound manner. The code is set to promote entrepreneurship, balance the interests of all stakeholders and make the much-needed credit available in the market. Under the code, the insolvency test has moved from ‘erosion of net worth’ to ‘payment default’.
In case of individuals and partnership firms, the code applies in all cases where the minimum default amount is Rs 1,000 and above. However, since the regulations in respect of insolvency resolution and bankruptcy of individuals have not been issued, it remains to be seen if the government revises the minimum amount of default to a higher threshold.
The code envisages two distinct processes in case of insolvencies: Automatic fresh start and insolvency resolution. Under the automatic fresh start process, eligible debtors can apply to the Debt Recovery Tribunal (DRT) for discharge from certain debts not exceeding a specified threshold, allowing them to start afresh. The insolvency-resolution process consists of preparation of a repayment plan by the debtor, for approval of creditors. If approved, the DRT passes an order binding the debtor and creditors to the repayment plan. If the plan is rejected or fails, the debtor or creditors may apply for a bankruptcy order.
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Once the regulations in this regard are issued by the Insolvency Board, it seems that if a business fails, the businessman doesn’t necessarily fail, he can still have a new lease of life by undergoing the insolvency resolution process and start afresh. The creditor whose dues have not been paid had to undergo the cumbersome and long-drawn process of recovery before the courts of India, where the resolution may take anywhere from one year to seven years, by when the money would have lost its value for the creditor and the creditor would have lost any hope of recovering the same.
Under the new regime, a time-bound resolution is possible and seems achievable since the process shall be driven by insolvency professionals, members of insolvency professional agencies registered with the Insolvency and Bankruptcy Board of India.
Similarly, a businessman whose business idea did not work the expected way and led to losses, leading to his inability to pay his debts in time, had to continue his business come what may, because he is not expected to give-up on his own idea. Under the new regime, however, the businessman has a chance to start afresh with a new business idea by filing for automatic fresh start under the code.
The writer is executive director, Nangia & Co