LawRato

Insolvency Petition: What Is It and How to File One?

April 07, 2024 हिंदी में पढ़ें


Table of Contents
  1. What is Insolvency?
  2. What is the Purpose of Insolvency Law?
  3. Is there a difference between Insolvency and Bankruptcy?
  4. The Four Pillars of IBC Infrastructure in India
  5. Who can file an Insolvency Petition?
  6. Where can an Insolvency Petition be filed?
  7. Distribution of Assets
  8. Why do you Need a Lawyer?

What is Insolvency?

Insolvency is when an individual or an organization does not have enough financial liquidities, leading to the impossibility to repay debts or when an individual or organization does not acquire enough assets to pay off all the debt. Thus, insolvency is a difficult situation or position when an organization or individual is not able to repay the money owed. When an entity is unable to repay the money or is in debt, that entity is called insolvent. As stated above, there can be two types of insolvencies:

  1. Balance sheet insolvency: When an entity does not acquire enough assets in order to clear all debts, this type of insolvency occurs.

  2. Cash flow insolvency: This is when the debtor suffers a lack of financial liquidities that makes it impossible to repay the money owed, is called Cash flow insolvency.
     


Talk to a Lawyer

What is the Purpose of Insolvency Law?

The main purpose of insolvency law is to help both the debtors and the creditors. The objective of Insolvency law is to maximize returns to the creditors through collective payment processes. Many insolvents are scared to file for insolvency and also are of the view that it is a debt recovery tool. However, Insolvency Proceedings are not exactly debt recovery tools and instead are collective in nature and are supposed to be beneficial for the entire body of creditors as well as debtors.


Is there a difference between Insolvency and Bankruptcy?

Even though insolvency and bankruptcy are used interchangeably, there is a slight difference between the two. Clearly, insolvency is a time of immense economic distress. Bankruptcy is an order by the court that declares that a certain entity, person, or organization is broke and does not have any financial funds and that it needs to incorporate certain measures in order to recover those debts. Thus, bankruptcy is essentially a legal procedure to solve the problem or condition of insolvency. You must take the help of a corporate or IBC lawyer if you or your company is insolvent and you need to file for bankruptcy.
 


The Four Pillars of IBC Infrastructure in India

In India, the first pillar of IBC's institutional infrastructure is Insolvency Professionals (IPs). An Insolvency Professional is one of the most important components of the IBC System. An IP is a licensed professional responsible for managing and overseeing the CIRP (Corporate Insolvency Resolution Process) or the liquidation process of the Corporate Debtor and also the resolution and bankruptcy process for individuals and partnerships. The Insolvency Professionals are aided by Information Utilities (IUs) for insolvency resolution, liquidation, and bankruptcy. IUs is the 2nd pillar of the institutional infrastructure. The Information Utilities are regulated and licensed repositories of information relating to the Corporate Debtor. They collect, collate, authenticate, and disseminate financial information to be used in insolvency resolution, liquidation, and bankruptcy proceedings. The 3rd pillar of the IBCs institutional infrastructure is adjudicating authorities (AAs) which are specialized tribunals tasked with ensuring that the insolvency resolution, liquidation, and bankruptcy process is being performed as per the IBC and related regulations. The 4th pillar is the Insolvency and Bankruptcy Board of India which acts as the regulator.
 


Talk to a Lawyer

Who can file an Insolvency Petition?

An individual or a creditor can file an Insolvency Petition under certain scenarios. This has been stated below:

1. An Individual can file an Insolvency Petition if he/she is not able to repay his/her debts under the following conditions:

  • The debt amounts to more than 500 Rupees,

  • If the individual has been imprisoned or is under arrest for the execution of a money decree,

  • If there is a subsisting order of attachment against this person's property in execution of such decree.

2. A Creditor can file an insolvency petition under the following conditions:

  • The debt amount that is due to the creditor is more than 500 Rupees,

  • If the debt is already due or will be due at a future date,

  • If an Insolvency Petition has been filed within 3 months of the act of insolvency.
     


Where can an Insolvency Petition be filed?

An Insolvency Petition is to be filed at a District Court having jurisdiction i.e. where the debtor resides or carries on his/her business. If the case is that the debtor has been arrested or imprisoned, then, the Insolvency Petition can also be filed where he/she is in custody. The Court may appoint an interim receiver after the presentation of the insolvency petition is made, or before an order is made. Once an order of adjudication is made, the property of the & lsquo insolvent individual' vests with the receiver or the official assignee and thereafter becomes divisible among the creditors.


Distribution of Assets

The year 2016 witnessed the enactment of the Insolvency and Bankruptcy Code 2016 - much-needed legislation. It consolidates and amends the legal framework that had existed before the 2016 Code was enacted. Section 53 of the Code has established an ordered priority among creditors that determines the sequence in which outstanding debts are to be repaid. These are:

1. IRP and liquidation costs

2. Workmen's dues (for 24 months), and secured dues, if the security has been relinquished

3. Employees' dues (for 12 months)

4. Unsecured financial creditors

5. Government dues, and unpaid dues to secured creditors, if the security has been realized

6. Remaining debts and dues (which include, unsecured operational debts)

7. Preference shareholders

8. Equity shareholders.
 


Why do you Need a Lawyer?

Insolvency and Bankruptcy can be tricky to understand in India. The IBC laws are fairly new and have been rapidly changing and adapting to recent times. It is thus important to hire a lawyer if you want to file an Insolvency Petition as an individual who owes a debt or as a creditor. It is important to understand the law before dealing with it in Court. Consulting an Insolvency and Bankruptcy Lawyer is a wise step to take before delving into and dealing with an Insolvency Petition.



These guides are not legal advice, nor a substitute for a lawyer
These articles are provided freely as general guides. While we do our best to make sure these guides are helpful, we do not give any guarantee that they are accurate or appropriate to your situation, or take any responsibility for any loss their use might cause you. Do not rely on information provided here without seeking experienced legal advice first. If in doubt, please always consult a lawyer.

Connect with top Corporate lawyers for your specific issue

Comments by Users


Advocate Ajay Kumar Nahar
After enactment of IBC 2016 previous act repealed ? Am I correct or not reply

Reply by LawRato
Yes, you are correct. The Insolvency and Bankruptcy Code (IBC) 2016 repealed the previous insolvency and bankruptcy laws in India, including the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) and the winding-up provisions of the Companies Act, 1956. The IBC was enacted with the aim of creating a comprehensive and time-bound insolvency resolution process for companies and individuals, which would help to address the problem of non-performing assets and promote the efficient use of resources.

Wilson and Company
Also Provincial Insolvency Act 1920, till relevant sections pertaining Individual in IBC r notified.

Reply by LawRato
As per Section 243 of the IBC, the Provincial Insolvency Act, 1920 stands repealed. However, the same provision states, that matters pending under the Provincial Insolvency Act, 1920 on the date of commencement of the IBC, shall continue to be governed by such Act as if the same had not been repealed.

Deep
An individual or a creditor can file an Insolvency Petition under certain scenarios (as mentioned above in the article). Which section talks about this?

Reply by LawRato
Section 14 of the Presidency Towns Insolvency Act, 1909 lay down the conditions on which a person may file an Insolvency Petition. 

Popular Corporate Lawyers


Advocate Prerna Oberoi
Sector 41, Noida
12 years Experience
Advocate JV Bhosale
Fort, Mumbai
16 years Experience
Advocate Sunil Kumar Bakshi
Sector-16, Faridabad
37 years Experience
Advocate Rajesh Rai
Sector-19, Dwarka, Delhi
24 years Experience

Related Articles


User Reviews


LawRato LawRato LawRato LawRato LawRato 4.6 - 15 reviews
S
LawRatoLawRatoLawRatoLawRatoLawRato

very well written

Shivangi on May 29, 2024
A
LawRatoLawRatoLawRatoLawRatoLawRato

thanks for the information

Aditi on May 06, 2024
S
LawRatoLawRatoLawRatoLawRato

Very helpful for my legal case.

Saurabh on May 14, 2024
B
LawRatoLawRatoLawRatoLawRato

helpful in understanding the law

Bhushan on May 21, 2024
A
LawRatoLawRatoLawRatoLawRatoLawRato

The writer has explained the law perfectly.

Akshay on Jun 10, 2024
G
LawRatoLawRatoLawRatoLawRato

very good article. Can you tell me more about the law?

Gaurav on Jun 04, 2024
V
LawRatoLawRatoLawRatoLawRato

how to contact a lawyer for my legal case?

Varsha on May 29, 2024
M
LawRatoLawRatoLawRatoLawRato

Very good work with the article. Gave a nice clarity about the subject.

Mansi on May 13, 2024
A
LawRatoLawRatoLawRatoLawRato

nice legal article.

Amandeep on May 15, 2024
M
LawRatoLawRatoLawRatoLawRatoLawRato

Answered all my legal queries.

Madhu on May 14, 2024
P
LawRatoLawRatoLawRatoLawRato

who can I contact for my legal case?

Pratibha on May 25, 2024
H
LawRatoLawRatoLawRatoLawRatoLawRato

nicely written. Great work

Hari on May 06, 2024
S
LawRatoLawRatoLawRatoLawRatoLawRato

very informative. Can you tell more about this

Shivani on Jun 19, 2024
G
LawRatoLawRatoLawRatoLawRatoLawRato

Very helpful in understanding the law.

Gaurav on Jun 02, 2024
K
LawRatoLawRatoLawRatoLawRatoLawRato

Detailed and informative.

Kishore on May 20, 2024

VIEW ALL