In common parlance, insolvency and Bankruptcy are often used interchangeably. However, there is a thin line of difference between these two words.
In common parlance, insolvency and bankruptcy is often used interchangeably. However, there is a thin line of difference between these two words.
In common parlance, insolvency and bankruptcy is often used interchangeably. However, there is a thin line of difference between these two words.
Insolvency is a financial situation, where an entity or an individual is unable to meet the financial obligations due to excess of liabilities over assets, whereas, Bankruptcy is a legal procedure where the court of law passes orders concerning insolvency of an individual or entity and consequently passes orders for its resolution.
Thus, an individual or an entity can be insolvent without being bankrupt and insolvency can lead to bankruptcy if the insolvent individual or entity is unable to overcome the financial catastrophe.
A company is declared insolvent if it is unable to pay its debts to its creditors. Following are two ways to check for corporate insolvency:
If the answer to any of the above questions is positive then the company is declared insolvent. A company can be declared as insolvent also if:
Corporate Insolvency Resolution Process (CIRP) is a recovery mechanism for creditors. If a corporation becomes insolvent, a financial creditor, an operational creditor, or the corporate itself may initiate CIRP.
The Insolvency and Bankruptcy Code, 2016 provides a provision for an application for insolvency or bankruptcy of start-ups, individuals, partnership firms, limited liability partnerships, and companies. The Code has provided a slab of default amount in each category however the final amount is to be notified by the Government as the trigger point to initiate the proceeding while keeping in view the fluctuation of the economy. It is important to understand that the said amount is not the minimum or maximum fixed amount of debt default but it is a ‘range’.
CIRP is initiated after making an application. CIRP is the process through which it is determined whether the person who has defaulted is capable of repayment or not. If a person is not capable of repaying the debt the company is restructured or liquidated. Following are the steps to be followed for resolution or liquidation of a corporate:
1. Application to NCLT: A financial or operational creditor of the company or the company itself can apply to the National Company Law Tribunal (NCLT). The application is made to admit that the Company (Corporate Debtor as per IBC) is into the corporate insolvency resolution process. For this, the creditor needs to show the default payment of a debt that exceeds INR 1,00,000 and within 14 days the NCLT has to pass an order either admitting or denying the application. There are different obligations that a financial and an operational creditor have to comply with when making their applications before NCLT. A financial creditor needs to submit the record of the default whereas an operational creditor needs to first make a demand for his unpaid debt. Based on an ongoing dispute, it is open to the corporate debtor to defend the claim.
2. Interim Resolution Professional & Moratorium: When a corporate debtor is admitted into the CIRP, it suspends the board of directors. Also, the management is placed under an independent ‘interim resolution professional’. Further, from this point onward the management ceases to have any control over the company affairs till the end of the CIRP. Simultaneously, a moratorium becomes effective which prohibits:
However, the moratorium does not extend to key business contracts entered into by the corporate debtor.
3. Verification and Analysis of Claims: At this stage, an interim resolution professional will summon and verify the claims made by the creditors and also classify them. After that, within 30 days of acceptance into CIRP, will form a Committee of Creditors (COC) which comprises of all the financial creditors of the corporate debtor.
4. Appointment of Resolution Professional: Within seven days of forming of the committee, the COC will have to either resolve to appoint the interim resolution professional as a resolution professional or to replace the interim resolution professional with another resolution professional.
5. Approval of the “Resolution Plan”: A resolution plan for the revival of the company must be approved within 180 days from the commencement of CIRP by creditors. The NCLT can extend this period by another 90 days. Any person, management, the creditors or a third party can propose such a plan. The resolution professional is responsible to ensure that the plan meets the criteria set out in the Insolvency and Bankruptcy Code, 2016.
We appreciate you contacting us at India Law Offices. We will review the details that you have submitted and one of our experts will connect with you shortly.