Differentiate between Insolvency and Bankruptcy. Discuss the changes proposed in Insolvency and Bankruptcy Code 2015 and its expected outcomes.

Insolvency is a situation when the debtor cannot meet its financial obligations i.e when he/she cannot pay back the money to lender on time, whereas, bankruptcy is a legal declaration of insolvency.
The need for “Insolvency and Bankruptcy Code 2015” arose due to increasing non-performing assets in public sector and private banks in India. The major recommendations in Insolvency and Bankruptcy Code 2015 are:

  • It will be applicable to individuals, companies, limited liability partnerships, partnership firms and other legal entities registered in India.
  • It proposes to establish an Insolvency Regulator.
  • It proposes Debt Recovery Tribunal (DRT) to be the Adjudicating Authority over individuals and unlimited liability partnership firms and appeals from DRT shall go to Debt Recovery Appellate Tribunal (DRAT).
  • The National Company Law Tribunal (NCLT) to be the Adjudicating Authority with jurisdiction over companies, limited liability entities and appeals from the NCLT shall lie to the National Company Law Appellate Tribunal (NCLAT).
  • The bill proposes a timeline of 180 days to deal with the applications for insolvency resolution with an option of extending it by 90 days for exceptional cases.
  • The bill also proposes to set up Insolvency and Bankruptcy Fund.

Outcomes

  • It will resolve the problem of delay in cases.
  • Comprehensive institutional architecture.
  • Legal certainty and predictabilityin the process.
  • Easy process of claim by the creditors also encourages financial institutionsto extend credit facilities.
Question for UPSC Mains:
Differentiate between Insolvency and Bankruptcy. Discuss the changes proposed in Insolvency and Bankruptcy Code 2015 and its expected outcomes.

Published: March 17, 2016 | Modified:June 27, 2019

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