Every nation around the globe has its own laws associated with Insolvency and Bankruptcy. However, many nations, that are not India, have expanded upon the rules associated with these laws with time. It has not until 1992 that the Indian constitution decided to formulate robust insolvency and resolution plan, and it was not only until 2016 that this plan gained a place in the Company Laws of India. The Insolvency and Bankruptcy Code, or to be succinct, the IBC might not be the pinnacle of perfection. However, it has done some extremely significant important things that require us to pay attention. That being said, most of the stuff that is available to read is not simple. To that end, heed to this article and you are going to know all about Insolvency and Bankruptcy in its simplest terms.
Definition of Insolvency and bankruptcy
Insolvency: Insolvency refers to a financial state where an entity has taken some debts that it is not able to pay back on the prescribed time. The entity, in this case, is called an insolvent entity. This entity can either be an individual or an organization, as a company.
Bankruptcy: Bankruptcy refers to the declaration of insolvency. This declaration can be made by the debtor himself (if the debtor is only an individual) or the creditors (the only option if the debtor is a company).
The handicap of the Insolvency Laws Until 2016
Most of the insolvency laws until 2016 can be talked about in two acts: The Presidency Housing act, and the provisional Bankruptcy Act. As much as these laws were applicable, they both had downsides that couldn’t be ignored:
The time is taken to deal with the insolvency issues was too long: There have been decades where the time took to resolve the insolvency issue could take up decades.
The laws were pretty fragmented: The acts that we have mentioned where two different acts. This difference stopped them from being enforceable at times. Furthermore, the difference also created a fair amount of confusion.
They could repel foreign investors: Due to the long time it took to resolve the insolvency, the foreign investors were never very enthusiastic to commit to Indian start-ups.
The old laws basically debtor centric: While the principle of natural justice dictate that the insolvent individual is helped, the creditor’s needs should also be catered to. While it was not ignored, it was strong enough.
These acts are two of the fragmented acts that made it evident that a change is the need of the hour. And therefore, the Insolvency and Bankruptcy act was born:
The IBC code came with the promise the insolvency acts shall be defragmented and the resolution process shall be handled in a matter of days, not decades.
To that end, they presented and enforced the following features:
- Creating a singular regulatory body: In order to represent a single coherent act, the code introduced a single regulatory body whose job was to oversee the resolution process of the insolvency. Additionally, the body also oversees the tribunals who judge these codes.
- Creating separate tribunals for individuals and companies: These tribunals or adjudicating authorities are now different for individuals and companies. For the individuals, the tribunal is DRT (Debt Recovery Tribunal) for companies, the tribunal is NCLT (National Company Law Tribunal)
- Creating laws to appoint an Insolvency professional: The primary goal of the goal was to successfully employ the process of insolvency. In order to do so, the Code created laws to appoint an insolvency professional who can undertake the process of insolvency resolution in a coherent and complete fashion. The agencies that are associated with such professionals are called insolvency professional agencies.
- Insolvency resolution process: This perhaps the essence of the code. The insolvency resolution process is a well-formulated process that uses the information of the company finances taken from the MCA website (information utility) and combines the expertise of the insolvency professional. The entire process is to be completed within a span of 180 days, with 270-day extension given.
These features have bore a lot of fruit. Till Now, nearly INR 3 Lakhs Crores have been recovered from the companies. Furthermore, the foreign investors now find is easy to do business in India.
This was but a brief explanation about the code. You can read about them online if you want, as now you would be able to understand what they are actually talking about.