Q 1. What is the difference between Insolvency and Bankruptcy?
An entity (individual, or a company) becomes insolvent when they are unable to pay back their lenders on time. Simply, when the assets fall short to pay off the existing liabilities.
Whereas, Bankruptcy is a legal declaration of one’s inability to pay their debts. On filing of bankruptcy, the entity is obligated to pay whatever it owes to its lenders which can be done in two ways:
1. Restructuring- where the debt is ‘re- structured’ or re- planned to make repayment easier.
2. Liquidation- where all the assets of the entity are sold and paid to debtors.
Thus, Insolvency is a state of being that might result in an entity filing for bankruptcy.
Q 2. When is IBC, 2016 applicable?
According to Section 2, the provisions of the Code shall apply for insolvency, liquidation, voluntary liquidation or bankruptcy of the following entities: –
(a) Any company
(b) Any Limited Liability Partnership
(c) Personal Guarantors to Corporate Debtors
(d) Partnership firms and Proprietorship firms;
(e) Individuals (Other than personal guarantors)
(f) Such other body incorporated under any law for the time being in force, as the Central Government may by notification specify in this behalf.
Q 3. What is the meaning of Default under IBC?
Default means a non-payment of debt when whole or any part or installment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be
Q 4. What is the threshold limit for initiation of corporate insolvency resolution process?
Rs 1 crore and above w.e.f. 24.03.2020 (Previously, it was Rs 1 Lakh and above)
Q 5. Who can initiate the insolvency proceedings?
The corporate insolvency resolution process may be initiated against any defaulting corporate debtor by
(a) Financial creditor – e.g. Individual money lender, banks, NBFCs,etc where money is lent (Section 7)
(b) Operational creditor e.g. supplier of goods or/and services (Section 9)
(c) Corporate debtor – a company/LLP who owes debt to any person (Section 10)
Q 6. What is the meaning of Financial creditor?
Section 5(7) of the Code defines Financial creditor – means any person to whom financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to. For example, Banks, Financial Institution, NBFC, any other person who lends / provide finance and Home Buyers(in case Real estate projects).
Q 7. What is the meaning of Operational creditor?
Operational Creditor is defined under section 5 (20), it means, a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.
Where, Operational Debt means a claim in respect of
(a) provision of goods, or
(b) provision of services including employment, or
(c) any dues payable to the government
Q 8. What is the meaning of Corporate debtor?
Corporate Debtor means a corporate person who owes a debt to any person. In simple terms, who accepted / taken money or loan from any person.
Q 9. Is there any time limit for completion of the Insolvency Resolution Process?
Section 12 of the Code states that any Insolvency Resolution Process shall be completed within a period of 180 days from the date of admission of the application to initiate the process. However, the NCLT may provide one extension which shall not extend more than 90 days.
Q 10. Who is an insolvency professional?
An Insolvency Professional is one who is registered with the Insolvency and Bankruptcy Board of India (IBBI). They are enrolled with an Insolvency Agency and they are involved in the dissolution process of an insolvent individual, companies, LLPs or partnerships. These professionals are authorized to act on behalf of such insolvent individual, companies etc. During the bankruptcy situation, the insolvency professionals play a vital role in liquidating the entity assets and other settlement processes.
Q 11. Why is IBC a code and not an act?
The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks to consolidate the existing framework (SARFAESI Act,2002; SICA,1985; DRT,1993, etc.) by creating a single law for insolvency and bankruptcy. Thus, IBC is like a summation of all existing acts.