Insolvency & Bankruptcy

1. Definition

Insolvency: A financial state where an individual or entity cannot meet its debt obligations as they become due. Bankruptcy: A legal process initiated when an insolvent individual or entity seeks relief from their debts through court proceedings, leading to the redistribution of assets.

2. Key Concepts

Insolvency vs. Bankruptcy: Insolvency is a financial condition; bankruptcy is a legal process that arises from insolvency.

Types of Insolvency:

• Cash-flow insolvency: Unable to pay debts as they fall due.
• Balance-sheet insolvency: Liabilities exceed assets.

3. Legal Frameworks

Different countries have specific laws governing insolvency and bankruptcy:

• India: The Insolvency and Bankruptcy Code (IBC), 2016.
• USA: Bankruptcy Code under Title 11 of the U.S. Code.
• UK: Insolvency Act 1986 and the Enterprise Act 2002.

4. Insolvency & Bankruptcy Process

For Individuals:

• Filing for bankruptcy through courts or insolvency tribunals.
• Appointment of a bankruptcy trustee.
• Asset liquidation and debt discharge.

For Companies:

• Initiatives like Corporate Insolvency Resolution Process (CIRP).
• Options include liquidation or reorganization (e.g., Business Restructuring).

5. Objectives of Insolvency & Bankruptcy Laws

• Protect creditors’ interests.
• Provide a structured process for resolving insolvency.
• Enable debtors to regain financial stability or facilitate equitable distribution of assets.

6. Recent Trends & Reforms

• Introduction of the Insolvency & Bankruptcy Code in India aimed at faster resolution.
• Emphasis on insolvency resolution for corporations, individuals, and small businesses.
• Use of insolvency professionals and tribunals to streamline processes.