12. INSOLVENCY & BANKRUPTCY
Insolvency and bankruptcy are related terms that are often used in the context of financial distress or inability to meet financial obligations.INSOLVENCY:
Insolvency refers to a financial state where an individual, company, or organization is unable to pay its debts when they become due. It is a condition where liabilities exceed assets, resulting in a lack of liquidity or ability to meet financial obligations. Insolvency can occur due to various factors, such as excessive borrowing, poor financial management, economic downturns, or unexpected financial setbacks. In the case of a business, insolvency can lead to difficulties in paying employees, suppliers, and other creditors.
BANKRUPTCY:
Bankruptcy is a legal process that is initiated when an individual or business is unable to repay their debts and seeks protection from creditors. It is a formal declaration of insolvency made through a court proceeding. Bankruptcy provides a structured framework to resolve the financial difficulties and distribute the available assets to creditors in a fair and orderly manner. The specific bankruptcy laws and procedures vary across countries, but they generally involve the assessment of assets, the appointment of a trustee to manage the assets, and the distribution of proceeds to creditors.
In India the recovery action by creditors, either through the contract Act or through special laws such as The Recovery of Debts Due to Banks and Financial Institutions Act, 1993, The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 has not had been desired outcome. Laws dealing with individual insolvency, the Presidential Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920 are almost a century old.
Insolvency and Bankruptcy Code,2016
This Act is to consolidate and amend the law 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 interest of all the stakeholders including alteration in the Order of Priority of payment of Government dues and to establish an insolvency and Bankruptcy Board of India, and for matter connected therewith or incidental thereto.
In short, insolvency is a financial condition where liabilities exceed assets, while bankruptcy is a legal process initiated to deal with insolvency by providing a framework for resolving debts and distributing assets among creditors. Bankruptcy is one potential outcome or solution when a person or business becomes insolvent, but it is not the only option available. Other alternatives, such as debt restructuring, negotiation with creditors, or voluntary arrangements, may also be pursued depending on the circumstances.
