Insolvency law in India governs situations where individuals or businesses are unable to meet their financial obligations. The framework is designed to balance the interests of debtors and creditors while ensuring economic stability. The Insolvency and Bankruptcy Code, 2016 (IBC) serves as the primary legislation, offering a time-bound resolution process to maximize asset value and promote business continuity.
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Key Legislation Governing Insolvency in India
1. The Insolvency and Bankruptcy Code, 2016 (IBC)
The IBC is the cornerstone of India's insolvency framework. It consolidates existing insolvency laws and provides a systematic approach to resolving financial distress. The key objectives of the IBC include:
● Facilitating a time-bound and efficient resolution process.
● Promoting entrepreneurship and ensuring the availability of credit.
● Protecting the interests of all stakeholders, including creditors and employees.
● Ensuring the liquidation process is fair and transparent if resolution is not viable.
2. The Companies Act, 2013
This Act lays down the framework for the winding-up of companies. While the IBC has largely superseded its provisions related to corporate insolvency, Sections 271-303 still apply to certain winding-up proceedings.
3. The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI Act)
This Act governs debt recovery proceedings for financial institutions through Debt Recovery Tribunals (DRTs).
4. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act)
This law allows secured creditors to seize and sell assets of defaulting borrowers without court intervention, ensuring swift debt recovery.
Corporate Insolvency Resolution Process (CIRP) Under IBC
The IBC establishes the Corporate Insolvency Resolution Process (CIRP) for companies facing financial distress. The process includes:
1. Initiation of Insolvency Proceedings
● A financial or operational creditor, or the debtor itself, can file an application before the National Company Law Tribunal (NCLT) to initiate insolvency proceedings.
● The NCLT appoints an Interim Resolution Professional (IRP) to take over the management of the company.
2. Moratorium Period
● Upon admission of the insolvency application, a moratorium is imposed, prohibiting legal actions and recovery proceedings against the debtor.
3. Resolution Plan
● A Committee of Creditors (CoC) is formed to decide on a resolution plan submitted by potential bidders.
● If approved by 66% of creditors and the NCLT, the plan is implemented to revive the company.
4. Liquidation
● If no resolution plan is approved within 180-270 days, the company moves into liquidation, and assets are sold to repay creditors.
Personal Insolvency and Bankruptcy
Apart from corporate insolvency, the IBC also covers individual insolvency under Part III of the Code. Individuals and partnership firms unable to repay debts can seek resolution through:
● Insolvency Resolution Process: A repayment plan is formulated with creditors.
● Bankruptcy Proceedings: If resolution fails, the debtor’s assets are liquidated to settle outstanding debts.
Penal Provisions Under Insolvency Law
The IBC includes strict penal provisions to prevent fraudulent and wrongful trading:
● Section 69: Punishment for false information during insolvency proceedings (imprisonment up to 5 years and/or fine up to ₹1 crore).
● Section 70: Punishment for concealment of property or fraudulent removal of assets.
● Section 71: Imprisonment of up to 5 years for misconduct during liquidation.