What do you mean by the term BANKRUPTCY in India?

Published on: Thu Jun 22 2023

Bankruptcy in India is governed by the Insolvency and Bankruptcy Code, 2016 (IBC), a comprehensive law that tackles corporate insolvency, individual bankruptcy, and partnership insolvency in a streamlined and time-bound manner. This term ‘bankruptcy’ plays a vital role in the economic dynamics of the country. In this article, we will explore the various aspects of bankruptcy, its legal framework in India, processes involved, and potential impacts.

Introduction

The term ‘bankruptcy’ refers to a legal status of a person or organization that cannot repay the debts it owes to creditors. The declaration of bankruptcy initiates a process, often initiated by the debtor, but sometimes by the creditors. This system ensures that the interests of all parties involved are protected, and that the debtor is given a fair chance to start afresh.

Legal Framework

The Insolvency and Bankruptcy Code (IBC) 2016 replaced several archaic laws and aimed to resolve insolvencies in a strict time-bound manner. The code essentially focuses on balancing the interests of all stakeholders, including alteration in priority of payment of the government's dues.

The Code's jurisdiction covers companies, partnerships, and individuals, and provides a clear, coherent, and speedy process for early identification of financial distress and resolution of companies and limited liability entities if the underlying business is found to be viable.

Process of Bankruptcy

The process of bankruptcy in India is systematic, transparent, and focused on providing a resolution in a time-bound manner. Here are the main steps involved:

Insolvency Resolution Process: If the debtor defaults, a financial or operational creditor or the debtor itself may initiate the insolvency resolution process. The debtor’s management and assets are then placed under the control of a resolution professional.
Committee of Creditors: The resolution professional forms a committee of creditors who collectively make decisions regarding the resolution process. The committee can either decide to restructure the debtor's debt by changing the repayment plan and continuing operations of the debtor, or decide to liquidate the debtor's assets to repay debts.
Resolution Plan: If the committee decides to restructure the debt, a resolution plan is proposed and voted on by the committee of creditors. If 66% of the committee approves the plan, it is then implemented.
Liquidation: If the committee of creditors decides not to restructure the debtor's debt, or if the resolution plan is rejected, the debtor's assets are sold to repay creditors. The priority of payments to the creditors is as per the Code’s hierarchy.
Discharge: Once the resolution plan has been implemented or the assets have been fully liquidated, the debtor is discharged, relieving them of any further liability for discharged debts.

Impact of Bankruptcy

The primary objective of bankruptcy laws is to give an indebted individual or business a fresh start by eliminating their debts. However, this comes at a price. The impact of bankruptcy includes:

Credit Score: Bankruptcy severely impacts the debtor’s credit score, which can make it challenging for them to avail of credit in the future.

Asset Loss: Depending upon the structure and specifics of the bankruptcy, individuals may end up losing assets, which are liquidated to pay back creditors.

Psychological Effects: The process of bankruptcy can also have profound psychological effects on the individual or business undergoing it.

On a broader level, the implementation of the IBC has brought about significant changes in India's credit culture. It has deterred wilful default, promoted responsible borrowing and credit behaviour, and driven financial and operational creditors to use the Code to resolve their bad debts.

Conclusion

Bankruptcy in India is a structured process that aims to provide a fair resolution to creditors while offering debtors an opportunity to rebuild their financial status. While it has serious implications for the parties involved, it serves a crucial function in maintaining the economic health of the country.

The Insolvency and Bankruptcy Code, 2016, has been a game-changer, instilling a measure of fear among corporate debtors and making insolvency resolution a matter of serious business. It has set India on a course towards greater financial discipline, responsibility, and growth.

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