Answer By law4u team
The Insolvency and Bankruptcy Code (IBC), 2016 establishes a legal framework for resolving insolvency and bankruptcy issues in India. Under the IBC, both debtors (individuals or companies) and creditors (financial or operational) have the right to initiate insolvency proceedings. The process varies slightly depending on the nature of the entity—whether an individual, partnership, or corporation—but the common goal is to facilitate debt resolution in a structured and time-bound manner.
Who Can File for Bankruptcy Under the IBC?
Corporate Entities
Who Can File:
A corporate debtor, such as a company, limited liability partnership (LLP), or partnership firm, can file for insolvency under the IBC.
Criteria:
Insolvency proceedings can be initiated by either the debtor (company) itself or its creditors. The debtor, if unable to pay its debts, can approach the National Company Law Tribunal (NCLT) for initiating the Corporate Insolvency Resolution Process (CIRP).
Initiation by Creditors:
A financial creditor (e.g., banks, financial institutions) or an operational creditor (e.g., suppliers, contractors) can also file an insolvency petition before the NCLT, provided there is a default of ₹1 crore or more in the case of corporate insolvency.
Individuals
Who Can File:
An individual or a partnership firm can file for personal insolvency under the IBC.
Criteria:
Individuals facing insolvency can approach the NCLT under the Individual Insolvency and Bankruptcy Process. Personal insolvency proceedings can be initiated either by the individual themselves (as a debtor) or by a creditor, provided there is an unpaid debt of ₹1,000 or more.
Debtor's Role:
The individual or partnership has the option to file voluntarily, seeking a solution to their financial difficulties, or creditors may file a petition if there is a default in repayment.
Financial Creditors
Who Can File:
A financial creditor, such as a bank or any institution lending money, can file for insolvency on behalf of the debtor.
Criteria:
Financial creditors can initiate insolvency proceedings if the debt is more than ₹1 crore. A financial creditor files an application with NCLT and can request the initiation of CIRP if the debtor fails to repay its debt.
Operational Creditors
Who Can File:
Operational creditors, such as suppliers or service providers, can also initiate insolvency proceedings.
Criteria:
Operational creditors can approach the NCLT with proof of default (e.g., unpaid invoices, outstanding service payments). The default amount must be ₹1 crore or more for the application to be accepted. If the debtor fails to respond or settle the claim within 10 days, operational creditors can begin the insolvency process.
Government or Regulatory Authorities
Who Can File:
The Reserve Bank of India (RBI), along with other regulatory authorities, can also file for insolvency in cases of financial institutions or entities under specific circumstances, particularly related to financial distress or failure to meet capital adequacy requirements.
Process for Filing for Bankruptcy
For Corporate Entities:
Step 1:
A petition is filed with the NCLT by the debtor or creditors, providing evidence of default (typically over ₹1 crore).
Step 2:
The NCLT reviews the petition, and if accepted, the Corporate Insolvency Resolution Process (CIRP) is initiated.
Step 3:
An Insolvency Professional (IP) is appointed to manage the debtor’s affairs during the process.
Step 4:
The Committee of Creditors (CoC) is formed, and the resolution plan is developed.
Step 5:
The CoC votes on the resolution plan or moves toward liquidation if a solution cannot be found.
For Individuals and Partnerships:
Step 1:
A petition is filed with the NCLT by either the individual or the creditors, proving a default in payment.
Step 2:
If the petition is accepted, the insolvency process is initiated, and the debtor's assets are assessed.
Step 3:
An Insolvency Professional is appointed, and a resolution plan may be proposed to resolve the debts.
Step 4:
If no resolution plan is successful, the individual’s or firm’s assets may be liquidated.
Example:
Example of Corporate Insolvency:
XYZ Ltd., a tech startup, is unable to meet its debt obligations to financial creditors due to a cash crunch. The company owes ₹2 crore to its creditors. The financial creditors, after several attempts to resolve the matter, decide to file for insolvency under the IBC.
Steps the creditors would take:
Petition Filing:
The creditors file a petition with the NCLT for initiating the Corporate Insolvency Resolution Process (CIRP).
Admission of Petition:
The NCLT admits the petition and declares a moratorium, protecting the company from legal actions.
Insolvency Professional Appointment:
An Insolvency Professional is appointed to take control of XYZ Ltd.
Committee of Creditors (CoC) Formation:
The CoC is formed, consisting of the financial creditors, to discuss and decide on the company’s future.
Resolution or Liquidation:
The CoC approves a resolution plan that restructures XYZ Ltd.’s debt, and the company continues its operations.
Example of Individual Insolvency:
A self-employed professional, A, is facing personal insolvency due to overwhelming debt. A owes ₹1.5 crore to several creditors, and is unable to repay.
Steps A would take:
Petition Filing:
A files a petition with the NCLT to initiate personal insolvency proceedings.
Review and Admission:
NCLT reviews the application and admits it, appointing an Insolvency Professional to manage A’s finances.
Debt Restructuring or Liquidation:
A and the creditors negotiate a resolution plan to restructure the debt, or if this is not possible, A’s assets are liquidated to repay creditors.
Conclusion:
Under the Insolvency and Bankruptcy Code (IBC), 2016, a wide range of entities, including corporate debtors, individual debtors, financial creditors, operational creditors, and even regulatory authorities, can file for insolvency. The law offers an accessible, structured process to resolve financial distress, protect creditor rights, and provide a path to rehabilitation or liquidation.
