Insolvency is the state of financial distress when someone is not able to pay their bills. For such people, there is a bankruptcy law which helps them in liquidating their assets to pay the debts or by creating a re-payment plan. The law also protect financially troubled businesses. Those in the state of insolvency are called as insolvent. There are two forms, cash-flow insolvency and balance sheet insolvency.
TThe legal process which serves the purpose of resolving the insolvency is called as bankruptcy. Under bankruptcy, it is legal declaration of one’s inability to pay off the debts. There are two forms of bankruptcy – reorganisation bankruptcy and liquidation bankruptcy. In the case of re-organisation bankruptcy, the payment plan of the debtor is restructured so that the debt is paid in a reasonable time. This is suitable for small business owner and the property is not liquidated. In the case of liquidation bankruptcy, the court or the government may sell the property/ assets of the debtor to raise money which can be used to pay the debt. Once the person has decided that filing for bankruptcy is the only right solution, you need to choose which type of bankruptcy is most suitable.
In India, the government has established IBBI (Insolvency and Bankruptcy Board of India) to implement the Bankruptcy code (2016) that consolidates and amends the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of the value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders.
If the creditor is not able to pay the debt and has filed for bankruptcy, upon RBI direction the lead banks admits case to the NCLT (National Companies Law Tribunal). Once the case is admitted insolvency and resolution professional is appointed and it in turn forms a committee of creditors. The committee is supposed to provide a resolution plan within 180-270 days and then the liquidation process starts.