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Insolvency And Bankcruptcy

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About Insolvency And Bankcruptcy

The objective of the Insolvency and Bankruptcy Code is to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the priority of payment of government dues and to establish an Insolvency and Bankruptcy Fund, and matters connected therewith or incidental thereto.

An effective legal framework for timely resolution of insolvency and bankruptcy would support development of credit markets and encourage entrepreneurship. It would also improve Ease of Doing Business, and facilitate more investments leading to higher economic growth and development.


In legal terms, 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. Technically insolvency could be a financial state when the value of total assets of an individual or a group exceeds its liabilities.

A person facing insolvency needs to take corrective actions to rectify its situation to avoid possible bankruptcy. This can be done in many ways like generating surplus cash or by minimizing the overhead cost. This can also be done by negotiating the repayment terms with your lenders.


When an individual is unable to pay off his liabilities and debts then he generally files for bankruptcy. Here is asks for help from government to pay off his debts to his creditors. Bankruptcy could of two types, namely, reorganization bankruptcy and liquidation bankruptcy. Usually people tend to restructure the repayment plans to pay them easily under reorganization bankruptcy. And under liquidation bankruptcy, the debtor tends to sell of certain of their assets to pay off their debts for their creditors.

One must follow a legal procedure to declare themselves bankrupt and get aid from government to deal with their creditors. To do this debtor must apply for bankruptcy in a relevant court. Or else one of his creditors files an application in a relevant court to declare that entity or person as bankrupt. This can also be result of a special resolution passed by Register of Companies for the entity to be declared bankrupt.


Insolvency Resolution

The Code outlines separate insolvency resolution processes for individuals, companies and partnership firms. The process may be initiated by either the debtor or the creditors. A maximum time limit, for completion of the insolvency resolution process, has been set for corporates and individuals. For companies, the process will have to be completed in 180 days, which may be extended by 90 days, if a majority of the creditors agree. For start ups (other than partnership firms), small companies and other companies (with asset less than Rs. 1 crore), resolution process would be completed within 90 days of initiation of request which may be extended by 45 days.

Insolvency regulator

The Code establishes the Insolvency and Bankruptcy Board of India, to oversee the insolvency proceedings in the country and regulate the entities registered under it. The Board will have 10 members, including representatives from the Ministries of Finance and Law, and the Reserve Bank of India.

Insolvency professionals

The insolvency process will be managed by licensed professionals. These professionals will also control the assets of the debtor during the insolvency process.

Bankruptcy and Insolvency Adjudicator

The Code proposes two separate tribunals to oversee the process of insolvency resolution, for individuals and companies:

  • the National Company Law Tribunal for Companies and Limited Liability Partnership firms; and
  • the Debt Recovery Tribunal for individuals and partnerships

Frequently Asked Questions

Insolvency is a financial state of being – one that is reached when you are unable to pay off your debts on time. Bankruptcy, on the other hand, is a legal process that serves the purpose of resolving the issue of insolvency.

Bankruptcy is a legal status of a person or other entity that cannot repay the debts it owes to creditors. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor. Technical insolvency occurs when an individual or a firm is unable to meet their financial obligations.

In legal terminology, the situation where the liabilities of a person or firm exceed its assets . In practice, however, insolvency is the situation where an entity cannot raise enough cash to meet its obligations, or to pay debts as they become due for payment.

The bankruptcy code is a one stop solution for resolving insolvencies which at present is a long process and does not offer an economically viable arrangement. A strong insolvency framework where the cost and the time incurred is minimized in attaining liquidation has been long overdue in India.

To qualify for the insolvency, you must show that all of your liabilities (debts) were more than the Fair Market Value of all of your assets immediately before the cancellation of debt. To show that you are insolvent and are excluding your canceled debt from income, you must fill out Form 982

According to the IRS, if you received a 1099-C tax notice that you had "income" from canceled or forgiven credit card debts, you may not have to pay taxes on some or all of that income. If your liabilities exceeded your assets when you settled the debt, then you were insolvent, according to the IRS.


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