Tracing The Formation Of The Insolvency And Bankruptcy Code 2016 And What Makes It A Game-Changer

Members of a company have the option of limiting their liabilities, hence it has always been one of the most preferred forms of conducting business. A company is a registered association having perpetual succession, a separate legal entity, common seal whose shares are transferable having limited liability. In order to comprehend the Insolvency and Bankruptcy Code 2016 effectively and to analyse its implementation critically, it is important to understand the pre-existing legal framework on Insolvency and Bankruptcy. Insolvency and Bankruptcy are two terms that are often used interchangeably but in fact, are not identical. Insolvency, if defined legally, is a state where a company or individual's liabilities exceed it's or his assets and when the debts or obligations become due for payment, the company or individual is unable to raise sufficient cash for payment. In layman's language, an Insolvency is a form of financial distress for a company or an individual in which it is not able to pay its debts when due. A number of factors can lead to insolvency for a business concern. These include improper maintenance of accounts and human resource management which may lead to a mis figured budget, increase in input costs, and lawsuits filed against a company. A company can deal with insolvency by taking corrective actions like straightforwardly negotiating with the creditors and restructuring the company's debt, creating a functional plan to bring down the overhead costs, and generating surplus cash et also that a situation of bankruptcy does not arise. Bankruptcy is a legalized procedure that companies, organizations, and individuals use to deal with insolvency. A company files a petition to being declared bankrupt, so as to become qualified for getting government aid when it is unable to pay off its liabilities. The two most common types of bankruptcy are Reorganization Bankruptcy and Liquidation Bankruptcy. Under Reorganisation Bankruptcy, the loan payable by the company is restructured to the debtor's advantage. Debtors sell off their assets in order to collect money to repay their debt. This is called Liquidation Bankruptcy. All 'bankrupt' individuals and companies are 'insolvent', but all 'insolvent' individuals and companies are not necessarily 'bankrupt'. Insolvency, most of the time is temporary and can be overcome by effective financial management. DEVELOPMENT IN LAWS GOVERNING INSOLVENCY AND BANKRUPTCY BEFORE 2016 Insolvency and Bankruptcy finds a place in the concurrent list of the Indian Constitution (Seventh Schedule). Both State and Central governments can frame laws and regulations to govern Insolvency and Bankruptcy in their respective jurisdictions. The Concurrent List plays a central role in upholding the federal structure of the country. The United States shares a similar structure. In the United States, initially, insolvency comes under the subject matter of the state, but once the bankruptcy process commences, only federal laws become applicable. In spite of having dual control policies, there has not been a single case in post-independence India, in which states have practiced their legislative prowess in framing laws either for insolvency or bankruptcy and all responsibility regarding the subject has been left to the centre. India, in its early years, followed a socialist model of development in which more emphasis was paid on social welfare and equity. The aim was to industrialize the public sector and create a labour incentive economy. The number of private sector companies was low due to the cumbersome and strict licensing procedures and lack of entrepreneurship freedom. Hence, these limited private sector companies created a monopoly-like situation in the market and the resources were not being used efficiently. Losses were being made in many of these units and their net worth was fast falling. This led to dissatisfaction among the intellectuals and over the years, with changing governments and its policies, the economic structure of India became more and more liberalized and bigger and better private sector companies established themselves. Economic growth overtook social welfare in the ranks of government priorities. Kohli (2012) assigns that "this complex political shift to several underlying political realities including a growing realization that redistributive possibilities were increasingly limited, the negative impact that radical rhetoric had had on the corporate sector's willingness to invest, and low industrial growth during the 1970s." Finally, in 1991, India saw the aftermath of 'Balance of Payment' crisis of the 1990s, India opened its doors to the outside world and the Liberalisation, Globalisation, and Privatisation policy was introduced. The political and economic climate played a pivotal role in influencing the laws regarding Insolvency and Bankruptcy in India. The key developments in the ...

Tracing The Formation Of The Insolvency And Bankruptcy Code 2016 And What Makes It A Game-Changer

Somya Luthra

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