Introduction to Insolvency and Bankruptcy in India | H&R Block | Blog
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Introduction to Insolvency and Bankruptcy in India

insolvency and bankruptcy act

In Ancient Greece, the concept of Bankruptcy was non-existent. If a man who owed something was not able to pay it back, then the family members would be sold into slavery until the debt was cleared. When a person decides to start a business, it is nurtured by its owner and treated like a living and breathing child. In case the owners are ignorant of how a business should be operated, then the business is already on the path to failure or bankruptcy.

Bankruptcy and Insolvency though they sound similar have different meanings. In India, individual bankruptcy laws have been in existence since 1874 and there used to be an earlier law called Provincial Insolvency Act 1920. The Parliament of India in May 2016 has passed the Insolvency and Bankruptcy Code 2016.

Bankruptcy is applicable to individuals who have declared bankruptcy in Court. Bankruptcy happens in two scenarios – the assets are less than the liabilities and are unable to pay their debts when they are due.  Insolvency on the other hand is the step before one files for bankruptcy. This occurs when the incoming cash flow falls below the outgoing cash. This means the income is too low to pay the debts out by an entity, person, family or company. For companies, the money in flow along with assets of the business are less than its liabilities.

Key Features

Insolvency Regulator: National Company Law Tribunal oversees the insolvency proceedings which is given to the statutory powers which contributes in simplifying the insolvency and bankruptcy proceeding procedure.
Bankruptcy and Insolvency Adjudicator: The cases are handled by the IBBU using two tribunals – NCLT (National company law tribunal) and Debt Recovery Tribunal (DRC).
Insolvency Resolution: The maximum time limit for the completion of insolvency resolution process is 180 days for companies (which may be extended by 90 days, if creditors agree).
Insolvency Professionals: The licenced professionals would manage the Insolvency process along with controlling the debtor’s assets during the process.

Here is the image that explains the Insolvency and Bankruptcy process flow:

insolvency and bankruptcy process flow diagram

Insolvency and Bankruptcy Code in India

The Insolvency and Bankruptcy Code (IBC) that was introduced by the Government in 2016, is one of the biggest economic reforms of the country. The IBC has a robust road map to deal with distressed businesses. Before the introduction of IBC, lenders were at the mercy of big borrowers. The new framework follows a time limit procedure and the cases that are admitted once are expected to be resolved within 270 days else companies go into liquidation otherwise.

The complete management control during the resolution process lies with the resolution professional.
This change has a huge impact on the debtor-creditor relationship that also contributes to improve the credit culture of the country. It also enables to do business with ease.  Despite of the recent changes to the IBC by the Insolvency and Bankruptcy Board of India, the code remains a work in progress that needs constant changes and updating of various laws as per requirement.

The Insolvency and Bankruptcy Section says that as per the recent amendment as per Section 29A bars:

  • Those who have their accounts differentiated as non-performing assets for more than a year and not able to settle their overdue settlements
  • Wilful defaulters
  • Those who have executed an enforceable guarantee in favour of creditor on behalf of the defaulter

The government has taken measures to ensure promoters are treated as ordinary loan defaulter. The Insolvency and Bankruptcy Code 2016 (IBC) is the law of India which consolidates the existing framework by creating one single law for Insolvency and Bankruptcy. The vacuum that exists in the firms under bankruptcy situations is cleared through this specialized resolution mechanism.

This mechanism would ensure better and faster debt recovery mechanism. It’s believed that international creditors and investors would be benefited which would enable them to continue growing investments in India.

For your business tax related queries, including tax planning, consult the experts at H&R Block India.

kalpana
kalpana
Kalpana R from the Digital Business Team at H&R Block is into Individual Taxation and handles client queries for a better client experience. She has a passion and purpose for writing that makes her explain the taxes in a simplified manner.

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