Author: Manoj Kumar Yadav , Narayan Uccha Shiksha Sansthan law collage , Jhalwa , Prayagraj.
TO THE POINT
Insolvency is a financial state in which a person or business is unable to pay obligations as they become due, whereas bankruptcy is a legal status declared by a competent court or authority following insolvency. While insolvency precedes bankruptcy, bankruptcy is the legal outcome of economic collapse.
Before the Insolvency and Bankruptcy Code of 2016, overlapping laws in India included the Companies Act of 1956, the Sick Industrial Companies (Special Provisions) Act of 1985 (SICA). These laws resulted in low recovery rates, inefficiencies, and delays.
The IBC was created in order to maximize asset value, promote entrepreneurship, ensure credit availability, balance the interests of all parties involved, and promptly amend and integrate laws relevant to reorganization and bankruptcy resolution.
One of the IBC’s unique features is its emphasis on time-bound resolution, which mandates that the Corporate Insolvency Resolution Process (CIRP) be finished within a specific time frame, failing which liquidation becomes unavoidable. This strict timeframe reflects the legislative objective to safeguard the value of stressed assets and discourage willful default. The Code also aims to balance the interests of all stakeholders, including owners, employees, operational creditors, and financial creditors, while giving priority to asset value maximization.
The IBC’s bankruptcy and insolvency laws are primarily rehabilitative and corrective rather than punitive. The Code aims to improve the ease of doing business in India, promote entrepreneurship, increase access to financing, and reinvigorate successful businesses.
USE OF LEGAL JARGON
The precise legal language used in the IBC’s insolvency framework is essential to understanding the process:
A corporate debtor is a corporate body that owes money to any individual.
Financial Creditor: Creditors to whom a debt is owed include banks and other financial organizations.
Operational Creditor: A creditor to whom an operational debt is owed, such as suppliers of goods and services.
When a debt is not paid on time, it is referred to as default.
A legally required process created to deal with a business debtor’s insolvency is called the Business Insolvency Resolution Process (CIRP).
A Resolution Professional (RP) is an insolvency specialist assigned to supervise the business debtor’s operations during CIRP.
The Committee of Creditors (CoC) is a group of financial creditors that determines significant business decisions.
Moratorium: The corporate debtor’s legal actions are legally suspended during CIRP.
Liquidation is the process of winding up a business debtor and distributing assets.
The adjudicating authorities are the Debt Recovery Tribunal (DRT) for people and the National Company Law Tribunal (NCLT) for corporations.
THE PROOF
In order to initiate insolvency operations under the IBC, the applicant must demonstrate default, which is the cornerstone of the Code.
1.Proof for Financial Creditors (Section 7)
A lender must provide:
The default was recorded using an information utility.
Contracts for loans
Bank statements showing nonpayment
A certificate attesting to default from a financial institution
The Supreme Court has said unequivocally that the existence of default alone is sufficient, and the Adjudicating ability has limited ability to take extraneous factors into account.
2.Proof for Operational Creditors (Section 9)
An operational creditor must prove:
The existence of operational debt
Product or service delivery
Serving a Section 8 demand notice
Absence of a continuous dispute
Documents include things like work orders, delivery receipts, invoices, and letters.
3.Proof of Corporate Debt (Section 10)
When a corporate debtor files a lawsuit, they must provide:
Books on accounting
A special resolution that the shareholders have approved
Proof of incapacity to repay debt
Initiating insolvency procedures thus requires documentary evidence.
4.The level of proof and the extent of judicial review
The standard of proof under the IBC is prima facie satisfaction rather than full adjudication. The Adjudicating Authority does not conduct roaming investigations into disputed factual matters. Its sole duty is to verify that the legal requirements are fulfilled.
The Code’s limited scope ensures that insolvency procedures remain timely and effective, which is consistent with the legislative objective.
5.Preventing Abuse and Providing Safety
To stop the misuse of bankruptcy procedures, the IBC contains provisions such as these:
Rejecting Section 65 petitions that were filed with malice or dishonest intent
Penalties for false information
Analysing documentary evidence in court
These safeguards ensure that insolvency procedures remain a means of resolution rather than coercive recovery.
ABSTRACT
Insolvency and bankruptcy are significant legal processes that address the financial struggles of individuals and companies. These concepts ensure a just settlement of debts, protect the interests of creditors, and give debtors an opportunity to sell or reorganize assets in a systematic manner. After the Insolvency and Bankruptcy Code, 2016 (IBC) was passed, India experienced a paradigm shift from a fragmented, debtor-friendly system to one that is driven by creditors and places a higher priority on timely resolution. This article examines the concept of bankruptcy and insolvency, the legislative framework that controls it, the factual evidence required to initiate proceedings, important court decisions, and the overall effectiveness of the insolvency system in supporting the Indian economy.
CASE LAWS
1.Innovative Industries Ltd. v. ICICI Bank (2017)
The Supreme Court decided that after default has been established, the NCLT must approve the application. Because the Code is all-inclusive and comprehensive, it takes precedence over other laws.
2.Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2018)
If there is a valid pre-existing dispute, an operational creditor cannot initiate insolvency procedures.
3.Swiss Ribbons Pvt. Ltd. v. Union of India (2019)
The constitutionality of the IBC was upheld. The Court recognized the sovereignty of the Committee of Creditors and emphasized that the Code prioritizes resolution over liquidation.
4.Essar Steel India Ltd. v. Satish Kumar Gupta (2019)
The CoC’s business knowledge is non-justiciable, according to the Supreme Court, and courts cannot intervene with it unless specific requirements are satisfied.
5.Vidarbha Industries Power Ltd. v. Axis Bank Ltd. (2022)
The Court determined that NCLT has the power to accept or reject insolvency applications, even in cases where default is demonstrated, based on the facts and circumstances.
CONCLUSION
The 2016 Insolvency and Bankruptcy Code significantly altered India’s legal and economic framework. By creating a uniform, creditor-driven, and time-bound bankruptcy system, the Code has significantly improved recovery rates, reduced delays, and reinforced credit discipline.
Despite persistent challenges like increasing liquidations, tribunal capacity constraints, and procedural delays, judicial precedents and legislative modifications have continuously strengthened the system. The emphasis on resolution rather than liquidation reflects the Code’s objective of preserving economic value and protecting jobs.
In conclusion, bankruptcy and insolvency laws serve as both tools for debt collection and tools for economic revitalization. If the insolvency system is implemented consistently, jurisprudence is established, and institutions are reinforced, it can play a significant role in fostering financial stability and long-term economic progress in India.
FAQS
1. What is the Bankruptcy and Insolvency Code of 2016?
The Insolvency and Bankruptcy Code, 2016 (IBC), a comprehensive law, provides a time-bound process for enterprises, LLPs, partnership firms, and individuals to resolve insolvency.
2. What is the main objective of the IBC?
Promoting entrepreneurship, reducing non-performing assets (NPAs), protecting creditors’ rights, maximizing asset value, and expeditiously resolving insolvency are the main objectives of IBC.
3. Who may initiate insolvency procedures under IBC?
The insolvency procedure may be initiated by the corporate debtor, financial creditors, or operational creditors.
4. To initiate CIRP, how much must be defaulted?
A minimum default amount of ₹1 crore is needed to start the Corporate Insolvency Resolution Process (CIRP).
5. What is the Corporate Insolvency Resolution Process, or CIRP?
CIRP is a legal process under IBC that aims to resolve a corporate debtor’s insolvency within a maximum of 330 days, including the litigation period.
6. What is the role of the National Company Law Tribunal (NCLT)?
NCLT is the adjudicating authority for corporate and LLP insolvency proceedings under IBC.
7. What is the role of an Insolvency Professional (IP)?
An insolvency professional is a credentialed individual who oversees the corporate debtor’s operations, performs CIRP, or acts as an interim resolution professional (IRP) or resolution professional (RP).
8. What is a moratorium according to IBC?
During the CIRP period, a moratorium is a temporary legal halt to:
• Recovery operations
• Security interest enforcement
• Suit filing.
