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A legal process involving such a person or business/entity that is not in the position to repay all the outstanding debts to its creditors. It is basically a process of liquidation of owned assets to satisfy the debts. A fresh start can be earned by individual person or the entity by providing the creditors with a means of repayment through the assets. After the process if successfully completed the entity or person is free from the obligation to repayment to the creditors. The principle involved in the proceeding is not providing the creditors with their investments but to create a flow for the business to run at the time of a financial hardship. In India, the provision to regulate the provisions relating to Bankruptcy is the Insolvency and Bankruptcy Code, 2016 (IBC).
The Insolvency and Bankruptcy Code, 2016 provides a time-bound, market mechanism for reorganisation and insolvency resolution of persons (companies, limited liability partnerships, partnership and proprietorship firms and individuals) in distress. The law came into force with the target of merging all the prevailing laws of bankruptcy and insolvency.
Bankruptcy Procedure under the Code (IBC)
The provisions relating to the bankruptcy and insolvency for individual and partnerships are enshrined under part III and IV of the code. The process begins by filling an application by the debtor or creditor. A debtor can start a proceeding through a fresh start application who is unable to repay his debt and shall be entitled to a fresh discharge if he qualifies the provided essentials for filling the same.
Conditions for a debtor to qualify for a fresh start before the Debt Recovery Tribunal
The conditions for a debtor to qualify for a fresh start before the Debt Recovery Tribunal after applying for such a process individually or through a resolution professional are:
- The gross annual income of the debtor does not exceed sixty thousand rupees;
- the aggregate value of the assets of the debtor does not exceed twenty thousand rupees;
- the aggregate value of the qualifying debts does not exceed thirty -five thousand rupees;
- he is not an undischarged bankrupt;
- he does not own a dwelling unit, irrespective of whether it is encumbered or not;
- a fresh start process, insolvency resolution process or bankruptcy process is not subsisting against him; and
- no previous fresh start order under this Chapter has been made in relation to him in the preceding twelve months of the date of the application for fresh start.
After such an application is filled by such a person or entity for the fresh start, an interim moratorium is started from the date of filing of such said application in contrast to all the debts. Moratorium is referred to the period of time during which the debtor does not have to pay any interest or return on the debts. During such a period:
- any legal action or legal proceeding pending in respect of any of his debts shall be deemed to have been stayed; and
- no creditor shall initiate any legal action or proceedings in respect of such debt.
Information to be supported with application
The application should be in accordance with the manner and fees prescribed under section 80 of IBC. The application should also be also containing following information in support with an affidavit:
- a list of all debts owed by the debtor as on the date of the said application along with details relating to the amount of each debt, interest payable thereon and the name of the creditors to whom each debt is owed;
- the interest payable on the debts and the rate thereof stipulated in the contract;
- a list of security held in respect of any of the debts,
- the financial information of the debtor and his immediate family for up to two years prior to the date of the application;
- the particulars of the debtor’s personal details, as may be prescribed;
- the reasons for making the application;
- the particulars of any legal proceedings which, to the debtor’s knowledge has been commenced against him;
- the confirmation that no previous fresh start order under this Chapter has been made in respect of the qualifying debts of the debtor in the preceding twelve months of the date of the application.
Circumstances when application for bankruptcy can be filled by debtor or by a creditor individually or jointly
Under part IV the application for bankruptcy can be filled by debtor or by a creditor individually or jointly with other creditors under section 121 of the code in the circumstances being-
- where an order has been passed by an Adjudicating Authority under sub-section 4 of section 100; or
- where an order has been passed by an Adjudicating Authority under sub-section2 of section 115; or
- where an order has been passed by an Adjudicating Authority under sub-section 3 of section 118.
Documents to be provided
Section 122 of the Code defines the documents which is to be provided by the debtor along with the application to the adjudicating authority. On the other hand, a creditor can start a resolution process. The resolution process begins with admission of an application filed by an entitled stakeholder in the event of a threshold amount of default. The Code envisages a calm period when the stakeholders endeavour to resolve the distress without fear of recovery or enforcement actions. In case of corporate insolvency, the creditors assess the viability of the corporate debtor (CD) and endeavour to rescue it through a resolution plan. Corporate insolvency resolution process (CIRP) ends up either with an approval of a resolution plan rehabilitating the CD or an order for commencement of its liquidation.
Under section 123 of the Code an application can be filled by the creditor which is to be accompanied by the records of insolvency resolution , a copy of the order passed by the authority permitting the creditor to apply for bankruptcy , details for debts owned by the debtor to the creditor and such more information as prescribed.
Effects on filing application
Under section 85 of the Insolvency and Bankruptcy Code the effects related to admission of application for bankruptcy filed by debtor are provided. The section provides for all the effects which takes place when an application is filled. The effects being:
- The moratorium period will commence from the date of admission of application in respect of all the debts.
- During the moratorium period – any pending legal action or legal proceeding in respect of any debt shall be deemed to have been stayed; and subject to the provisions of section 86, the creditors shall not initiate any legal action or proceedings in respect of any debt.
- During the moratorium period, the debtor shall –
- not act as a director of any company, or directly or indirectly take part in or be concerned in the promotion, formation, or management of a company;
2. not dispose of or alienate any of his assets;
3. inform his business partners that he is undergoing a fresh start process;
4. be required to inform prior to entering into any financial or commercial transaction of such value as may be notified by the Central Government, either individually or jointly, that he is undergoing a fresh start process;
5. disclose the name under which he enters into business transactions, if it is different from the name in the application admitted under section 84;
6. not travel outsides India except with the permission of the Adjudicating Authority.
- The moratorium ceases to have effect at the end of the period of one hundred and eighty days beginning with the date of admission unless the order admitting the application is revoked under sub-section (2) of section 91.
Under section 125 of the Code an Insolvency Professional can be appointed as a bankruptcy trustee. As per the Code an insolvency professional (IP) can be defined as person who is eligible by being enrolled in an insolvency professional agency (IPA) and its members and who is registered with the Board of Insolvency and Bankruptcy Board of India as an IP. An IP can be proposed as the bankruptcy trustee in the application under section 122 or section 123. The above application can be only be accepted if the adjudicating authority passed a bankruptcy order within fourteen days of receiving the confirmation or nomination of bankruptcy trustee under section 125 of the code. A Bankruptcy order can be defined as an order by the authority to the individual or entity to declare them bankrupt.
Bankruptcy order is defined under section 126 of the Code. Under section 130, the adjudicating authority issues notices within ten day of bankruptcy commencement date to the creditors which are mentioned by the statement of affairs submitted by the bankrupt person or entity under section 129 and then issues a public notice inviting claims from creditors against the bankrupt. After which the bankruptcy trustee shall within 21 days from the commencement of bankruptcy date issue a notice for calling in a meeting of the creditors, to every creditor of the bankrupt as mentioned in the list defined under section 132 of the Code.
Such a notice shall contain all the necessary details. The Bankruptcy trustee under section 136 of the code shall conduct the administration and distribution of the estate of the bankrupt in accordance with the provisions of Chapter V of the code. Under Section 138 of the Code the debtor can be released from the personal liability for the certain specified debts which means that he is not legally required to pay any debts that have been discharged by the order under section 138 of the Code. The discharge order is applied by the bankruptcy trustee to the adjudicating authority on the expiry of the one year from the commencement of bankruptcy date or within seven days from the approval provided by the committee of the creditors of the completion of administration of the estates of the bankruptcy under section 137.
The authority then shall pass a discharge order for the application applied by the trustee. Section 139 defines the effect of discharge.
Modification or recalling of a bankruptcy order
On a suo moto application the adjudicating authority may modify or recall a bankruptcy order, whether or not the bankrupt is discharged, under section 142 of the Code if the appears to the adjudicating authority that-
- (a) there exists an error apparent on the face of such order; or
- both the bankruptcy debts and the expenses of the bankruptcy have, after the making of the bankruptcy order, either been paid for or secured to the satisfaction of the Adjudicating Authority.
In the cases of any modification of the order by the adjudicating authority (AA), any sale or alienation of property or payments made by the Bankruptcy trustee shall be valid.
If the committee of creditors is of the belief that the bankruptcy trustee appointed under section 125 of the Code is required to be replaced, then the committee may replace it with another bankruptcy trustee as the manner provided under section 145 of the Code. With a vote of seventy-five percent of voting share, the committee may replace the bankruptcy trustee with another bankruptcy trustee. The committee have to apply to the AA for the replacement of Trustee. A Bankruptcy Trustee may even resign under section 146 of the Code if-
(a) he intends to cease practising as an insolvency professional; or
(b) there is conflict of interest or change of personal circumstances which preclude the further discharge of his duties as a bankruptcy trustee.
If after the replacement or the resignation of a bankruptcy trustee a vacancy arises, the Code provides for such situation through section 147 which provides for vacancy in office of bankruptcy trustee. Section 147 reads as if any vacancy occurs in the office for any reason other than his resignation or replacement, the vacancy shall be filled in accordance with this section. In such a situation the AA may bring in notice to the board and then appoint a Bankruptcy trustee in recommendation by the Board.
Section 148 Provides for the release of the bankruptcy trustee which state that he shall be released from the office after the AA passed an order for the appointment of new bankruptcy trustee in any of the situation under section 145, 146 or 147 or as the case maybe. The realised bankruptcy trustee before his release from the office should share all the necessary information in regard to the bankruptcy process.
Hence, The Insolvency and Bankruptcy Code, 2016 provides a time-bound, market mechanism for reorganisation and insolvency resolution of persons (companies, limited liability partnerships, partnership and proprietorship firms and individuals) in distress. The law came into force with the target of merging all the prevailing laws of bankruptcy and insolvency.