Insolvency and Bankruptcy
Insolvency: is a state where the liabilities of an individual or an organization exceeds its asset and that entity is unable to raise enough cash to meet its obligations or debts as they become due for payment.
Bankruptcy: When an individual is unable to pay off his liabilities and debts then he generally files for bankruptcy. Here he/she asks for help from the government to pay off his debts to his creditors.
For reorganization and insolvency resolution of corporate persons, partnership firms and individuals.
- Minimum default of Rs 1 crore is needed to trigger IBC.
- Time bound process – 180 days, some cases 270 days maximum.
- No Deadlock – if resolution is not done, assets are to be sold to pay debtors.
- It is not applicable for Willful Defaulters.
- IBC proposes a new institutional setup comprising the
- Following four critical pillars:
- The National Company Law Tribunal (NCLT) as the adjudicating authority.
- Insolvency professionals (IPs) to manage the insolvency and bankruptcy cases.
- Information utilities (IUs) to reduce information asymmetries.
- Insolvency and Bankruptcy Board of India (IBBI), a regulator
Comparison Between Insolvency and Bankruptcy
| Aspect | Insolvency | Bankruptcy | Insolvency and Bankruptcy Code (IBC) |
|---|---|---|---|
| Definition | A state where liabilities exceed assets, and the entity cannot raise enough cash to meet its obligations. | When an individual or entity is unable to pay off their debts and seeks assistance from the government to settle debts with creditors. | Legislation aimed at reorganizing and resolving insolvency of corporate persons, partnership firms, and individuals. |
| Trigger | Financial distress where debts exceed assets. | Inability to repay debts leads to the filing of bankruptcy. | Minimum default of Rs 1 crore is needed to initiate the insolvency resolution process under IBC. |
| Process | Focuses on reorganization and resolution of financial distress through negotiations with creditors or restructuring. | Formal legal process overseen by courts, involving assessment of assets, liquidation, and distribution to creditors. | Time-bound process of 180 days, extendable to 270 days in certain cases, aimed at resolving insolvency and ensuring timely resolution of default cases. |
| Outcome | Resolution of financial distress through restructuring or negotiation with creditors. | Liquidation of assets to pay off debts, with any remaining debts typically discharged. | Ensures a resolution process within a defined timeline, with a focus on maximizing the value of assets through reorganization or liquidation, depending on the viability of the entity. |
| Applicability | Applicable to corporate entities, partnership firms, and individuals facing financial distress. | Primarily applicable to individuals and entities facing insurmountable debt. | Designed to address the needs of a wide range of stakeholders, including creditors, debtors, and investors, by providing a transparent and efficient mechanism for resolving insolvency cases. |
| Institutional Support | Involves National Company Law Tribunal (NCLT), Insolvency Professionals (IPs), Information Utilities (IUs), and Insolvency and Bankruptcy Board of India (IBBI). | Typically overseen by bankruptcy courts or relevant judicial bodies. | Establishes a comprehensive institutional framework comprising adjudicating authorities, insolvency professionals, information utilities, and a regulatory body to ensure effective implementation and oversight of the insolvency resolution process. |
FAQs Insolvency and Bankruptcy
What is insolvency, and how is it defined?
Insolvency is a state where the liabilities of an individual or organization exceed its assets, rendering it unable to raise sufficient cash to meet its obligations or debts as they become due for payment.
What is bankruptcy, and how does it differ from insolvency?
Bankruptcy occurs when an individual is unable to pay off their liabilities and debts, leading them to seek assistance from the government to settle debts with creditors. It is a legal process initiated by individuals to manage their debt when they are unable to pay it off.
What is the purpose of the Insolvency and Bankruptcy Code (IBC)?
The IBC is designed for the reorganization and insolvency resolution of corporate persons, partnership firms, and individuals. It provides a legal framework for addressing insolvency and bankruptcy situations efficiently.
What are the key features of the IBC process?
The IBC mandates a minimum default threshold of Rs 1 crore to trigger insolvency proceedings. It sets a time-bound process of 180 days, extendable to 270 days in some cases. If resolution is not achieved, assets are sold to pay debtors, ensuring no deadlock in the process. However, the IBC does not apply to willful defaulters.
What are the key institutional pillars proposed by the IBC?
The IBC proposes a new institutional setup consisting of: The National Company Law Tribunal (NCLT) as the adjudicating authority.
Insolvency professionals (IPs) responsible for managing insolvency and bankruptcy cases.
Information utilities (IUs) to reduce information asymmetries.
Insolvency and Bankruptcy Board of India (IBBI) as the regulatory body overseeing the implementation of the IBC.
