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CODE, 2016
Meaning of Insolvency
Insolvency can be defined as the situation in which any organization or
individual is unable to meet its short-term or immediate debt obligations. It
can also be easily explained as the inability of a person or organization to pay
its creditors.
The term insolvency is commonly confused with bankruptcy and is often used
incorrectly as a synonym for bankruptcy. Although both insolvency and
bankruptcy deal with liabilities exceeding assets, insolvency refers to a financial
state and bankruptcy to a distinct legal concept, a matter of law.
Insolvency is defined as a financial condition or state experienced when:
(a) A legal entity or a person’s liabilities (debts) exceeds their assets,
commonly referred to as 'balance-sheet' insolvency; or
(b) When a legal entity or person can no longer meet their debt obligations on
time as they become due, commonly referred to as 'cash-flow' insolvency.
A state of insolvency can lead to bankruptcy but the condition may also
be temporary and fixable without legal protection from creditors.
Insolvency does not necessarily lead to bankruptcy, but all bankrupt
debtors are considered insolvent.
Existing Laws Relating to Recovery of Debt
and Revival of Borrowers
The legislation with respect to recovery of debts has undergone a gradual shift
in India over the decades. At present there are many options available to
different class of creditors, which are discussed in brief as follows: -
CPC- A creditor may file a money recovery suit against a defaulting debtor
under the Civil Procedure Code, 1908 (CPC) with jurisdictional Civil Court.
However, owing to high backlog of cases and slow adjudication process, it
may take decades to obtain a decree against the debtor through this route.
SICA - The Board of Industrial & Financial Reconstruction (BIFR) was set
up under Sick Industrial Companies (Special Provisions) Act,1985 (‘SICA’).
However, SICA principally is inclined towards helping revive sick
companies rather than helping lenders to recover their dues. SICA provides
moratorium from any action against the defaulting company while a revival
plan is worked out.
However, there is no time restriction within which BIFR may decide whether it is
practicable for a sick industrial company to stand on its feet again. Reference to
BIFR thus became a safe harbour for defaulting companies to delay debt recovery.
Further, SICA is applicable only for industrial companies having existence of
minimum 5 years and whose net-worth is eroded. Owing to
these reasons BIFR route is widely believed to have failed to achieve desirable
results.
We can see from above how response of Indian policy makers to problem of
debt recovery over time has progressed but failed to yield desired results
THE INSOLVENCY AND Bankruptcy code,
2016
A need was therefore felt to attempt a complete overhaul of the debt recovery
system. The Government has therefore enacted the Insolvency and
Bankruptcy Code, 2016 on the recommendation of T. K. Viswanathan
Committee. The Code repeals or overrides around 11 laws and promises to
bring a sea change in how debt recovery and insolvency are handled in
India, drawing from the current best practices in the West.
OBJECTIVES OF CODE
(1) The objective of the code is to consolidate and amend the laws relating to
insolvency and bankruptcy of corporate persons, partnership firms and
individuals
(2) The code aims at promoting investments as well as resolution of
insolvency of corporate persons, firms and individuals in the time bound
manner.
(3) It provides for designating the NCLT and DRT as the adjudicating
Authorities.
(4) The code separates commercial aspects of insolvency and bankruptcy
proceedings from judicial proceedings.
(5) It also provides for establishment of the insolvency and bankruptcy board
of India for regulation of insolvency professionals, insolvency professional
agencies and information utilities.
(6) Section 2 of the Act deals with the applicability of the Act.. It is applicable
on the following:
(a) Any company(incorporated under Companies Act,2013 or any other
previous company law)
(b) Any other company governed by any special law.
(c) Any limited liability partnership firm incorporated under the Limited
Liability Partnership Act, 2008.
(d) Any other body incorporated under central government.
(e) Personals guarantors to corporate debtors;
(f) Partnership firms and proprietorship firms; and
(g) Individuals , other then persons referred to in clause (e).
Important definitions under the Act (section-
3)
In this Code, unless the context otherwise requires, -
(1)“Board” means the Insolvency and Bankruptcy Board of India established
under sub-section (1) of section 188;
(7) “corporate person” means a company as defined in clause (20) of section 2
of the Companies Act, 2013 (18 of 2013), a limited liability partnership, as
defined in clause (n) of sub-section (1) of section 2 of the Limited Liability
Partnership Act, 2008 (6 of 2009), or any other person incorporated with
limited liability under any law for the time being in force but shall not
include any financial service provider
(8) “corporate debtor” means a corporate person who owes a debt to any
person;
(10) “creditor” means any person to whom a debt is owed and includes a
financial creditor, an operational creditor, a secured creditor, an unsecured
creditor and a decree-holder;
(11) “debt” means a liability or obligation in respect of a claim which is due from
any person and includes a financial debt and operational debt;
(12) “default” means non-payment of debt when whole or any part or installment
of the amount of debt has become due and payable and is not 1[paid] by the
debtor or the corporate debtor, as the case may be;
(21) “information utility” means a person who is registered with the Board as an
information utility under section 210;