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Insolvency and Bankruptcy-History and Objective


Insolvency and Bankruptcy-History and Objective

What is the insolvency and Bankruptcy?

Meaning of insolvency:

Insolvency is when an individual, corporation or other organization cannot meet its financial obligations for paying debts as they are due or the condition of a person who is unable to pay his debts as they fall due, or in the usual course of trade and business.

Meaning of Bankruptcy:

Bankruptcy is not exactly the same as insolvency. Technically, bankruptcy occurs when a Court has determined insolvency, and given legal orders for it to be resolved. Insolvency describes a situation where the debtor is unable to meet his/her obligations. Bankruptcy is a legal maneuver in which an insolvent debtor seeks relief.

Object of Insolvency and Bankruptcy law:

The law of insolvency is a social legislation which has been enacted to provide relief to the honest debtors who due to any unfortunate or unforeseen circumstances become incapable of paying back their debts. Its object is also of securing distribution of a debtor’s estate among his creditors equitably and thereafter to release him under certain conditions from liability in respect of his debts and obligations.

Constitutional Validity to make the law:

Constitution has empower to Central and State Government to make the law about Insolvency and Bankruptcy matter in list – III (concurrent list) of seventh schedule of constitution of India.
Both Center and State Governments has power make the laws relating to this subject.

Insolvency Laws for Individuals and Corporates:

I. For individuals and unincorporated entities:

There are two laws which govern Insolvency and Bankruptcy of individual and unregistered corporate person.

• Presidency Towns Insolvency Act, 1909
• Provincial Insolvency Act, 1920

The Presidency Towns Insolvency Act, 1909 and Provisional Insolvency Act, 1920 are two major enactments that deal with personal insolvency and have parallel provisions and their substantial content is also similar but the two differ in respect of their territorial jurisdiction. While Presidency Towns Insolvency Act, 1909 applies in Presidency towns namely, Kolkata, Mumbai and Chennai and Provincial Insolvency Act, 1920 applies to all rest of India. These two Acts are applicable to individuals as well as to sole proprietorships and partnership firms.

Jurisdiction for filing Insolvency Petition:

Application can file under:
1. Presidency Towns Insolvency Act, 1909 to the High Courts at Kolkata, Madras and Bombay And
2. Provincial Insolvency Act, 1920 in the district court.

II. For Corporate:

• Companies Act, 1956
• The Sick Industrial Companies (Special Provisions) Act, 1985
• Recovery of debt due to Banks and Financial Institutions Act, 1993
• Securitization and Reconstruction of Financial Assets And Enforcement of Security Interest Act, 2002 (SARFAESI)

For reforming  the Insolvency Act following committee organized:

1. Shri. T. Tiwari Committee
2. N L Mitra Committee
3. Justice Eradi Committee
4. JJ Irani Committee

Banking Laws Reforms Committee for IBC code, 2016

The Bankruptcy Law Reforms Committee (Chairman: Dr. T. K. Viswanathan) submitted its report to the Finance Ministry on November 4, 2015. The objectives of the Committee were to resolve insolvency with:
(i) Lesser time involved,
(ii) Lesser loss in recovery, and
(iii) Higher levels of debt financing across instruments.

Insolvency refers to a situation where individuals or organisations are unable to meet their financial obligations. If insolvency cannot be resolved, a company proceeds towards liquidation of assets, and an individual goes in for bankruptcy resolution.

The Committee has recommended a consolidation of the existing legal framework, by repealing two laws and amending six others.

It has proposed to repeal the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920. In addition, it has proposed to amend:
(i) Companies Act, 2013,
(ii) Sick Industrial Companies (Special Provisions) Repeal Act, 2013,
(iii) Limited Liability Partnership Act, 2008
(iv) Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002,
(v) Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and
(vi) Indian Partnership Act, 1932.

The Insolvency and Bankruptcy Code 2016

Reason behind the Insolvency and Bankruptcy code, 2016:

In India, there were multiple laws like Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), the Recovery of Debt Due to Banks and Financial Institutions Act, 1993, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) and the Companies Act, 2013 dealing with insolvency and bankruptcy of companies, limited liability partnerships, partnerships firms, individuals and other legal entities in India. As a result High Courts, District Courts, the Company Law Board, the Board for Industrial and Financial Reconstruction (BIFR) and the Debt Recovery Tribunals (DRTs), have jurisdiction at various stages, giving rise to the potential systemic delays and complexities in the process whereas liquidation of companies is handled by the high courts, individual cases are dealt with under the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920. The present legal framework does not aid lenders in effective and timely recovery of defaulted assets and causes undue strain on the Indian credit system.

The Objectives of Insolvency and Bankruptcy Code, 2016:

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.

An insolvency resolution process can be initiated by either a financial creditor or by operational creditor or the corporate applicant (corporate debtor) upon an event of default. A revival plan be resolved within 180 days from the admission of the application. Making this process time bound is very essential as the value of the assets can erode substantially with the passage of time. In the event of disagreement or if a decision is not taken within the stipulated time-frame the applicant automatically moves to the next stage of Insolvency Process.

It was rightly said by Ralph Waldo Emerson– “Every Wall is a Door”
Thus, take a step forward to open the door for the new FDI norms.

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