Insolvency and Bankruptcy

Insolvency and Bankruptcy

Insolvency is a financial state where an individual or organization cannot pay their debts as they fall due, while bankruptcy is a legal process initiated in court to resolve this insolvency when other means fail. 

Insolvency vs. Bankruptcy

Feature	Insolvency	Bankruptcy
Nature	A state of financial distress (cash-flow or balance-sheet issues).	A formal legal procedure or judicial declaration.
Scope	Applies to individuals, companies, and partnership firms.	In jurisdictions like the UK and India, the term is typically reserved for individuals and partnership firms, while corporate entities undergo liquidation.
Process	Can sometimes be resolved informally through negotiation or debt restructuring without court intervention.	Involves a formal application to an adjudicating authority (e.g., NCLT or DRT in India).
Outcome	May lead to a business turnaround, a formal resolution plan, or, if unsuccessful, the legal process of bankruptcy or liquidation.	Typically results in the sale of assets to pay creditors, with most remaining unsecured debts being written off, providing a "fresh start".

The Legal Framework in India: The IBC, 2016

In India, insolvency and bankruptcy are governed by the Insolvency and Bankruptcy Code, 2016 (IBC). The Code consolidates fragmented laws into a unified, time-bound, and creditor-driven framework for resolution. 

Key Components:

• Regulator: The Insolvency and Bankruptcy Board of India (IBBI) oversees the process and regulates associated professionals (Insolvency Professionals, Information Utilities, etc.).
• Adjudicating Authorities:
  • National Company Law Tribunal (NCLT): Handles cases for companies and Limited Liability Partnerships (LLPs).
  • Debt Recovery Tribunal (DRT): Manages cases for individuals and partnership firms.
• Process: The standard process for companies is the Corporate Insolvency Resolution Process (CIRP), which aims to revive the company or, failing that, proceed to liquidation.
• Objective: The primary goal is to maximize the value of assets and promote entrepreneurship and credit availability by ensuring timely resolution, typically within a mandatory limit of 330 days (though this can be extended by the courts in certain cases). 

The IBC has led to a significant improvement in India's credit culture and recovery rates compared to older mechanisms by shifting control to creditors during the resolution process.