Have you ever wondered what happens if you can’t pay your debts? Both individuals and businesses facing financial difficulties in India need to understand the different types of bankruptcies and related remedies.
Post-2016, with the Insolvency and Bankruptcy Code (IBC) in play, India’s approach to bankruptcy has transformed. This code outlines three primary bankruptcy types: Corporate, Personal and Group Bankruptcy catering to various sections of society from individuals and companies to larger corporations.
Types of Bankruptcies in India
With the introduction of the Insolvency and Bankruptcy Code in 2016, India’s approach to bankruptcy has become more structured and simplified.
This legislation categorizes bankruptcies into different groups, providing a more structured framework. The three kinds of bankruptcy scenarios are listed as below:
1. Corporate Bankruptcy (Insolvency)
Corporate Bankruptcy under the Insolvency and Bankruptcy Code (IBC) of 2016 deals with insolvency situations of corporations. This has further evolved with the Amendment Act of 2021. This type primarily addresses the resolution or liquidation of corporate entities that are unable to repay their debts.
Definition:
Corporate Bankruptcy refers to the legal process involving a corporate entity’s inability to repay its debts, leading to either restructuring or liquidation under the IBC.
Eligibility:
Any corporate entity, including companies and limited liability partnerships, that cannot pay off its debts is eligible for this process.
Process:
The process of Corporate Bankruptcy under India’s Insolvency and Bankruptcy Code involves several key steps:
- Starting the Process: The process begins when either the debtor or creditors file an insolvency petition.
- Appointing an Insolvency Professional (IP): Next, an Insolvency Professional (IP) is appointed. This expert takes charge of the company’s assets and oversees the whole bankruptcy procedure.
- Forming a Committee of Creditors (CoC): The IP forms a committee comprising the debtor’s creditors. This group plays an important role in decision-making during the insolvency process.
- Resolution Plan or Liquidation: Now, the CoC has two choices. They can either try to save the company with a resolution plan or decide to sell off its assets (liquidation). The resolution plan must be approved by a majority of the creditors and then by the adjudicating authority. If a resolution plan is not possible, the company is liquidated.
Duration:
Aimed at a time-bound resolution, the duration varies based on case specifics.
Debtor’s Rights:
Debtors can propose a resolution plan and participate in hearings.
Creditor’s Rights:
Creditors vote on resolution plans and receive dues from asset liquidation.
Notable Case:
One notable instance of Corporate Bankruptcy in India is the case of Dewan Housing Finance Ltd. (DHFL). Established in 1984, DHFL was a prominent non-banking financial company focusing on housing finance.
The company faced allegations of diverting significant loan amounts to shell companies, leading to its default on bond payments and interest dues.
Consequently, the Reserve Bank of India intervened, superseding the DHFL board and initiating a resolution under the IBC.
Upon digging deeper, the investigation found connections between DHFL’s funds and suspicious entities. After the insolvency proceedings, the Piramal Group acquired the company. This marked a significant turning point in the case, reshaping the future of DHFL.
2. Personal Bankruptcy (Insolvency)
Personal Bankruptcy in India refers to the legal process through which individuals who are unable to pay their debts can seek relief. This process is different from corporate bankruptcy and is tailored to address the debts of individuals.
Definition:
Personal bankruptcy in India, according to the Insolvency and Bankruptcy Code (IBC) 2016, focuses on the legal process for individuals who are unable to repay their debts.
The bankruptcy process allows individuals to either restructure their debt or liquidate their assets. This system offers a structured approach for individuals to manage and resolve their financial burdens when they are financially distressed.
Eligibility:
It applies to any individual (not a corporate entity) who cannot repay their debts.
Process:
The process of personal bankruptcy under the Insolvency and Bankruptcy Code in India typically involves these steps:
- Filing a Petition: The individual (debtor) who is unable to pay their debts files a bankruptcy petition in a relevant authority, such as the Debt Recovery Tribunal.
- Assessment of Assets and Liabilities: After the petition is filed, there is an assessment of the individual’s financial situation, including their assets and liabilities. This is to understand the extent of the insolvency.
- Development of a Repayment Plan: Depending on the individual’s financial status and the assessment, a repayment plan may be developed. This plan outlines how the debtor intends to settle their debts.
- Adjudication: The authority, after reviewing the petition and repayment plan, may decide on the relief to be granted to the debtor.
- Implementation of the Plan: If approved, the repayment plan is implemented under the supervision of a designated professional.
Duration:
Aimed at a time-bound resolution, the duration varies depending on the complexity of the case and the specifics of the individual’s financial situation.
Debtor’s Rights:
Debtors have the right to file for bankruptcy and to present a full account of their financial situation, including all assets and liabilities.
They can propose a repayment plan to settle their debts and have the right to be heard in the bankruptcy proceedings. Debtors are also protected from discrimination based on their bankruptcy status.
Creditor’s Rights:
Creditors can file claims against the debtor’s estate and are entitled to a fair distribution of payments, either from the debtor’s estate or as per the repayment plan.
Creditors also have the right to object to the proposed repayment plan and to participate in meetings related to the bankruptcy proceedings. They can also appeal decisions made during the bankruptcy process.
Notable Case:
One of the notable cases of personal bankruptcy in India involves the case under the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920. These acts cover insolvency for individuals including proprietorships and partnerships.
A specific example is the case of Bharath N Mehta v. Mansi Finance Ltd. This case brought to light an important point: criminal charges against a bankrupt individual, specifically under the Negotiable Instruments (NI) Act, can’t be halted even if they’re related to debts that led to insolvency proceedings.[2]
3. Group Bankruptcy (Insolvency)
Group bankruptcy, also referred to as insolvency for corporate groups in the IBC, is a process designed to handle the insolvency of businesses that are interconnected, typically within a corporate group structure.
This type of bankruptcy is particularly relevant for conglomerates or corporate groups where multiple entities are financially interdependent.
Definition:
The specifics of group bankruptcy under the IBC involve addressing the complexities arising from the interconnectedness of different corporate entities within a group.
It aims to provide a more efficient and holistic approach to insolvency proceedings for such interconnected companies, recognizing their interdependencies and collective financial health.
Eligibility:
Eligibility for group bankruptcy under the IBC typically involves corporate entities that are part of a larger group of companies. These entities are often financially interdependent and their insolvency processes need to be managed collectively to ensure an efficient resolution.
Process:
The process of group insolvency in India, as derived from judicial practices and recommendations, includes:
- Consolidation of Proceedings: Group insolvency starts by merging the insolvency cases of related companies. This is usually done when these companies share things like ownership, directors or financial links.
- Judicial Oversight: The National Company Law Tribunal (NCLT) oversees these consolidated proceedings.
- Coordinated Approach: The process aims to manage different cases in a way that doesn’t mess up how assets are split or affect the rights of the creditors.
- Single Adjudicating Authority: Instead of having different authorities for different companies, one authority administers all proceedings within a group.
- Appointment of Insolvency Professionals: A single professional handles insolvency processes for the entire group.
- Group Creditors’ Committee: A committee is formed which represents all the creditors from every company in the group.
Duration:
Aimed at a time-bound resolution, the duration varies depending on the complexity of the group’s structure, the interdependencies among the entities and the specific financial circumstances of the group. These are often of a longer duration compared to individual corporate insolvencies.
Debtor’s Rights:
Debtors’ rights primarily involve their ability to participate in the proceedings. They have the right to be heard and to present their case before the adjudicating authority. Debtors can also propose a resolution plan for the entire group or for individual entities within the group.
Creditor’s Rights:
Creditors have the right to file claims, participate in creditors’ committee meetings and vote on resolution plans. They can object to proposed plans and seek redress through the adjudicating authority.
Notable Case:
A notable case of group insolvency proceedings in India is the Videocon Industries case. In this case, a consortium of banks led by the State Bank of India filed an application for the substantive consolidation of fifteen Videocon companies into a single proceeding for the Corporate Insolvency Resolution Process (CIRP).
The NCLT allowed this consolidation for thirteen of the fifteen companies. This decision was significant as it set a precedent for handling insolvency proceedings involving complex corporate groups in India.
Frequently Asked Questions
1. What are the different types of bankruptcies available in India?
- India’s legal framework includes:
- Corporate Bankruptcy (Insolvency)
- Personal Bankruptcy and
- Group Bankruptcy.
2. Who is eligible to file for bankruptcy in India?
Eligibility to file for bankruptcy in India varies depending on the type of bankruptcy. Generally, individuals, partnerships, companies and other corporate entities facing financial distress can explore bankruptcy options.
3. What is the general process for filing bankruptcy in India?
The general process for filing bankruptcy in India involves petitioning the National Company Law Tribunal (NCLT) or Debt Recovery Tribunal (DRT) for insolvency proceedings, including assessing assets, and liabilities and potentially developing a repayment plan.
4. How long does the bankruptcy process typically take in India?
The duration of the bankruptcy process in India varies based on case specifics. These aim for a time-bound resolution influenced by factors like complexity and negotiations with creditors.
5. What rights does a debtor retain during bankruptcy in India?
Debtors in India retain certain rights during bankruptcy, including the ability to propose a resolution plan, participate in hearings and seek relief from undue harassment.
6. What claims and rights do creditors have in an Indian bankruptcy case?
Creditors have the right to vote on resolution plans and receive dues from asset liquidation in an Indian bankruptcy case. Their claims are considered as part of the resolution or liquidation process.
7. What are the legal implications of filing for bankruptcy in India?
Legal implications of filing for bankruptcy in India include the initiation of insolvency proceedings, court involvement and adherence to the legal framework under the Insolvency and Bankruptcy Code (IBC) 2016.
8. How does bankruptcy impact an individual’s or company’s credit in India?
Bankruptcy can impact an individual’s or company’s creditworthiness in India, affecting their ability to secure loans or credit facilities in the future.
9. How does bankruptcy in India differ for individuals versus businesses?
Bankruptcy proceedings in India differ for individuals and businesses. While both involve insolvency resolution, the specific regulations and procedures may vary based on the entity’s type and size.
10. What are the common misconceptions about bankruptcy in India?
Bankruptcy in India is seen as total financial ruin. In reality, it’s a legal way to handle debts. Not all assets are lost in bankruptcy; some are safeguarded. The process isn’t quick but can be lengthy. Plus, bankruptcy doesn’t permanently damage credit; it can be repaired with good financial habits.
Final Thoughts
Understanding the three types of bankruptcies in India – Corporate, Personal and Group Bankruptcy – is important.
For individuals, it provides a way to manage debts. Businesses benefit by making informed choices about restructuring or liquidation. This knowledge helps all stakeholders to better handle financial crises, protect assets and engage effectively with the legal system, ultimately leading to more favorable outcomes in insolvency situations.