Difference between Insolvency & Bankruptcy under Insolvency and Bankruptcy Code of 2016
Introduction: Insolvency and bankruptcy are related but distinct concepts in the field of financial distress and debt resolution. The Insolvency and Bankruptcy Code (IBC) of 2016, enacted in India, provides a comprehensive framework for dealing with insolvency and bankruptcy matters.
1. Insolvency: Insolvency refers to a financial state in which an individual or entity is unable to pay off their debts as they become due. Insolvency can arise due to various reasons such as business failure, excessive borrowing, economic downturns, or mismanagement of finances.
2. Bankruptcy: Bankruptcy is a legal status or process that follows insolvency. It is a formal declaration that an individual or entity is unable to repay its debts and seeks legal protection and assistance for debt resolution. Bankruptcy involves a court-supervised procedure to liquidate assets, settle debts, and provide relief to the debtor by discharging or restructuring the debts.
Tabular Difference between Insolvency & Bankruptcy:
|
Point of Difference |
Insolvency | Bankruptcy |
| 1. Definition | Insolvency refers to a financial condition where an individual or corporate debtor is unable to pay its debts as they become due. | Bankruptcy refers to a legal process for resolution of insolvency, where the assets of the debtor are liquidated or reorganized for the benefit of creditors. |
| 2. Nature | Insolvency is a state. | Bankruptcy is the conclusion. |
| 3. Initiated by | Can be initiated by the debtor or creditors.
|
Can be initiated by creditors or by the debtor in certain circumstances. |
| 4. Appointment |
Involves the appointment of an insolvency professional, who takes control of the assets and business of the debtor and manages the resolution process. | Involves the appointment of a resolution professional, who takes control of the assets and business of the debtor, prepares a resolution plan and submits it to the creditors for approval. |
| 5. Time frame | Insolvency proceedings must be completed within 330 days, with a possibility of a 90-day extension in certain circumstances. | Bankruptcy proceedings must be completed within 180 days, with a possibility of a 90-day extension in certain circumstances. |
| 6. Impact on credit | Can have a significant impact on the creditworthiness of the debtor. | Can have long-lasting effects, such as a stain on an individual’s credit report for several years. |
| 7. Eligibility | Any individual or corporate debtor that is unable to pay its debts as they become due is eligible for insolvency proceedings. | Eligibility for bankruptcy depends on the financial situation of the individual or corporate debtor and the type of bankruptcy being sought. |
| 8. Effect on debts | Insolvency proceedings do not result in the discharge of debts. | Bankruptcy proceedings may result in the discharge of some or all debts, depending on the type of bankruptcy and the resolution plan approved by the creditors. |
| 9. Control over assets | During insolvency proceedings, the insolvency professional takes control of the assets and business of the debtor. | During bankruptcy proceedings, the resolution professional takes control of the assets and business of the debtor, and the court may approve the sale or liquidation of assets as part of the resolution process. |
| 10. Creditor involvement | The degree of creditor participation in insolvency proceedings will vary depending upon the nature and context of the proceedings. | Creditors play an active role in bankruptcy proceedings, as they must approve any resolution plan submitted by the resolution professional. |
Note: It’s important to note that insolvency and bankruptcy can have serious consequences for individuals and businesses, and it’s crucial to understand the differences and seek professional advice before proceeding with either option. The Insolvency and Bankruptcy Code of 2016 in India provides a comprehensive framework for resolving insolvency and bankruptcy and can be an important tool for individuals and businesses facing financial difficulties.
Conclusion:
In conclusion, under the Insolvency and Bankruptcy Code of 2016 in India, insolvency refers to a financial condition where debts cannot be paid, while bankruptcy refers to the legal process aimed at resolving the financial problems caused by insolvency. The IBC provides a framework for the resolution of insolvency and bankruptcy in India, with strict time frames and procedures to be followed.
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