The Insolvency and Bankruptcy Code, 2016 is a recent legislation which is introduced to bring all the affairs of insolvency and bankruptcy of Company, LLPs, Firms, individuals under a single umbrella. Part-III of the code comprises of provisions related to insolvency and bankruptcy of individuals and firms.
Insolvency and bankruptcy are the terms which are understood one and same by in language but in actual legal sense they are not same. Insolvency is a phase in which a person do not have enough assets which can be discharged to pay the money borrowed in due time. It is just a stage where a person is not able to honour the outstanding payments in due time whereas Bankruptcy is an ultimate situation where the person is not in a position to pay his debt at all.
When a person or entity cannot pay his debts and lack current assets to discharge his indebtedness then in order to pay his debts, his business is liquidated by a legal process. This legal process is bankruptcy which is the result of insolvency.
The process of insolvency resolution and bankruptcy is different as per Insolvency and Bankruptcy Code, 2016. Each individual process is similar in case of individual and partnership firm. Process of insolvency resolution and bankruptcy is discussed below individually.
INSOLVENCY RESOLUTION PROCESS – INDIVIDUAL AND PARTNERSHIP FIRM.
A. The process for filing the application
1. Firstly an application is submitted to the adjudicating authority to initiate the process of insolvency and resolution.
2. This application can be submitted by the individual debtor or in case of partnership firm the debtor being the partner can file the application with the consent of all the partners or majority of partners
3. The debtor cannot file the application in following cases-
- If he is an undischarged bankrupt;
- If he is undergoing a fresh start process;
- If he is undergoing an insolvency resolution process; or
- If he is undergoing a bankruptcy process.
4. A creditor can also file the application by him or jointly with the other creditors or through resolution professional to the adjudicating authority.
B. Interim moratorium
After filing the application, an interim moratorium period shall begin on the date of filing of the application. This period is referred in relation to all the debts and will end on date of admission of application. The importance of this moratorium is that all the legal proceedings and legal actions against property of debtor will be left on status quo thereby leading that no fresh proceeding can be instituted and all existing proceeding will pause.
C. Appointment of Resolution professional
A Resolution professional (hereinafter RP) plays a very significant in carrying on the process of insolvency in a systematic manner, hence he is appointed. If an application for initiating the process was filed by RP then he could be appointed after satisfying certain grounds and if the application was not filed through him then adjudicating authority mat direct the board to appoint an RP to carry forward the process of insolvency.
D. Submission of report by RP
Within ten days of his appointment, RP is required to submit the report to the adjudicating authority after examining the application. By his report, RP recommends approval or rejection of the application as the case may be. He can also ask for certain evidences from debtor of his repayment to the creditor if the application is filed is under section 95 of the code.
After receiving report from RP, the adjudicating authority decides to admit or reject the application within 14 days from the date of report.
If it admits the application then on the request of RP it may order guidelines to hold negotiations between debtor and creditor in order to make a well-specific repayment plan.
It may also reject the application after realising that the application was filed with the intention to defraud creditors or RP and thereby creditor is entitled to file for bankruptcy under part IV of the code.
When Adjudicating Authority decides to admit application under section 100, a moratorium shall come into force in relation to all the debts for 180 days from the date of admission of the application or on the date the Adjudicating Authority passes an order on the repayment plan under section 114, whichever is earlier.
G. Public notice and claims from creditors
Within seven days from passing of the order under section 100, Adjudicating Authority issues a public notice in order to invite claims from all the creditor within 21 days of such notice.
H. Registering of claims by creditors
Subsequent to the notice, creditors will send communication electronically or through courier to register their claims to RP and can also be required to provide personal information as may be prescribed.
BANKRUPTCY PROCESS – INDIVIDUAL AND PARTNERSHIP FIRM
The application for bankruptcy is filed only when the following conditions are satisfied-
- When adjudicating authority rejects the application of insolvency resolution process.
- When adjudicating authority rejects the repayment plan.
- When repayment plan could not be implemented due to some reasons.
- Application can be filed either by debtor or creditor.
B. Interim Moratorium
After filing the application under section 122 or 123, an interim moratorium period shall begin on the date of filing of the application. This period is referred in relation to all the debts and will end on the date of bankruptcy commencement date.
The importance of this moratorium is that all the legal proceeding and legal actions against property debtor will be left on status quo thereby leading that no fresh proceeding can be instituted and all existing proceeding will pause.
C. Appointment of insolvency professional as bankruptcy trustee and further process.
After the appointment of an insolvency professional as bankruptcy trustee, a bankruptcy order under section 126 of the code is directed by Adjudicating Authority within 14 days. Within 7 days of bankruptcy order Adjudicating authority provides a copy of the application for bankruptcy and a copy of the bankruptcy order to the bankrupt, bankruptcy trustee and creditors.
After the passing of bankruptcy order the estate of the bankrupt shall be conferred to bankruptcy trustee and creditors as prescribed under section 128 of code. Within 7 days from the bankruptcy commencement date the bankrupt (individual) is liable to submit his statement of financial position to the bankruptcy trustee. In case of partnership firm, the partners on the date of the order are required to submit a joint statement of financial position of the firm, and each partner of the firm is under an obligation to submit a statement of his financial position as well.
Subsequent to that Public notice inviting claims from creditors will be sent by the Adjudicating authority within 10 days of the bankruptcy commencement date as prescribed under section 130 of the code. Consequent to the notice, creditors will send communication electronically or through courier to register their claims to RP and can also be required to provide personal information as may be prescribed.
After this a list of creditors is prepared and a meeting is summoned thereby of all creditors. After the meeting and voting by creditors in resolution Administration and distribution of estate of bankruptcy is done as prescribed under section 136 of the code.
This article is written by Pooja Sharma, 2nd Year (BA LLB) student at College-University School of Law and Legal Studies(GGSIPU)