Table of Contents
Bankruptcy law in India provides a legal framework for individuals and businesses facing financial distress, offering a way to manage and resolve unmanageable debts.
With the introduction of the Insolvency and Bankruptcy Code (IBC) in 2016, the country streamlined insolvency procedures, enabling faster and more efficient debt resolution.
This blog explores how bankruptcy law works in India, including key legislations, the resolution process, and its impact on both individuals and businesses seeking relief from financial challenges.
Understanding Bankruptcy Law in India
Bankruptcy laws in India are designed to provide a legal framework for individuals and businesses unable to repay their debts.
By facilitating a structured process to either repay creditors or liquidate assets, these laws ensure fairness for all parties involved. The objective is to balance the rights of creditors and provide debtors with a chance to resolve their financial troubles.
Bankruptcy proceedings in India are often misunderstood. While they are associated with financial failure, these laws actually aim to promote economic recovery and allow businesses or individuals to make a fresh start.
How Does Bankruptcy Law Work in India?
The process of bankruptcy in India revolves around the Insolvency and Bankruptcy Code (IBC) of 2016. This law was introduced to streamline the resolution of insolvency and bankruptcy cases efficiently.
- Triggering Bankruptcy: Bankruptcy proceedings begin when a debtor or creditor files an application before the National Company Law Tribunal (NCLT) for corporate debtors or the Debt Recovery Tribunal (DRT) for individuals.
- Admitting the Application: Upon receiving the application, the tribunal verifies the claims and determines if insolvency resolution can proceed. For corporate debtors, the process involves appointing a Resolution Professional (RP) to oversee operations.
- Resolution Plan: For businesses, the resolution plan must be approved by 66% of the creditors. If no resolution plan is approved within 180-270 days, the company may proceed to liquidation.
- Liquidation: In cases where repayment or resolution is not feasible, assets are sold, and proceeds are distributed among creditors in a defined order.
For individuals, the process involves repayment plans or asset liquidation, ensuring that creditors recover as much as possible while protecting basic living rights for debtors.
To gain a deeper understanding of business, law, and related topics, you can read more.
Key Legislations Governing Bankruptcy
Several key laws govern bankruptcy and insolvency proceedings in India. These laws ensure a clear process for debtors and creditors:
- The Insolvency and Bankruptcy Code (IBC), 2016: This is the most significant legislation, covering individuals, partnerships, and companies. The IBC simplifies and unifies insolvency proceedings.
- The Companies Act, 2013: Sections of this act deal with winding up companies and dissolution.
- The Recovery of Debts and Bankruptcy Act, 1993: This act specifically addresses debt recovery processes for banks and financial institutions.
- SARFAESI Act, 2002: This legislation allows secured creditors to seize and auction assets of defaulting borrowers without court intervention.
By consolidating these laws under the IBC, India has achieved a faster and more efficient resolution process, essential for business stability and economic growth.
Who Can File for Bankruptcy in India?
Bankruptcy proceedings in India are open to various parties, depending on their financial standing and debts.
- Individuals: Any person unable to repay debts can file for bankruptcy through the Debt Recovery Tribunal. This typically includes business owners, professionals, or consumers burdened by loans.
- Corporate Debtors: Companies or partnerships facing insolvency can file applications before the National Company Law Tribunal (NCLT).
- Creditors: Financial and operational creditors, such as banks, lenders, or suppliers, can initiate insolvency proceedings against defaulting debtors to recover dues.
The eligibility to file for bankruptcy hinges on meeting specific default thresholds, ensuring that trivial financial issues do not burden the legal system.
The Bankruptcy Resolution Process
The bankruptcy resolution process is a structured framework under the Insolvency and Bankruptcy Code (IBC). Here’s how it typically unfolds:
- Filing a Petition: A creditor or debtor initiates bankruptcy proceedings by filing a petition with the relevant tribunal (NCLT or DRT).
- Admission of Petition: Once admitted, a moratorium period is declared to halt all ongoing legal actions against the debtor, providing time for resolution.
- Appointment of Resolution Professional: The Resolution Professional takes charge of the business, oversees its operations, and works on a viable repayment or restructuring plan.
- Creditors’ Committee: A committee of creditors (CoC) is formed to evaluate and approve the proposed resolution plan.
- Approval or Liquidation: If the plan is approved, it is implemented to resolve debts. If not, the company or individual’s assets are liquidated, and proceeds are distributed to creditors.
The IBC ensures that the resolution process remains time-bound, with a maximum limit of 330 days to resolve insolvency cases.
Impact of Bankruptcy on Individuals and Businesses
Bankruptcy can have significant financial and reputational implications for both individuals and businesses.
- For Individuals: Bankruptcy provides relief from unmanageable debt but can affect credit scores, borrowing ability, and personal assets. However, it also ensures that basic living standards are protected during asset liquidation.
- For Businesses: Filing for bankruptcy can result in loss of control over operations and potential liquidation of assets. On the positive side, businesses can benefit from restructuring plans, allowing them to recover and continue operations under a viable financial model.
From a broader perspective, bankruptcy laws create a healthier business environment by encouraging responsible borrowing and providing a structured exit for businesses in distress.
Conclusion
India’s bankruptcy laws, particularly under the Insolvency and Bankruptcy Code (IBC), aim to streamline insolvency resolution and ensure fairness for creditors and debtors.
By facilitating timely resolution, asset recovery, and economic revival, the bankruptcy process provides a structured way for individuals and businesses to overcome financial challenges.