Insolvency is the situation where the debtor is not in a position to pay back the creditor. For a corporate firm, the signs of this could be a slow-down in sales, missing of payment deadlines etc. Bankruptcy is the legal declaration of Insolvency. So the former is a financial condition and latter is a legal position. All insolvencies need not lead to bankruptcy. The new code has a sequential procedure of Insolvency resolution, failing which, it leads to Bankruptcy (following liquidation of assets).
Need of Code
- Such a unified code is essential because currently the issue is handled under at least 13 different laws. This code seeks to replace the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920. In addition, it seeks to amend 11 laws, including the Companies Act, 2013, Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and Sick Industrial Companies (Special Provisions) Repeal Act, 2003, among others.
- Earlier, if a company defaults, there were at least four different legal routes available to the debtors and creditors. This could lead to multiple negotiations, multiple penalties etc. for the debtor, compounding his plight.
- Such parallel proceedings had also given rise to numerous instances of conflict between the laws. Four different agencies, the high courts, the Company Law Board, the Board for Industrial and Financial Reconstruction (BIFR), and the Debt Recovery Tribunals (DRTs) have overlapping jurisdiction, giving rise to the potential of systemic delays and complexities in the process. This new bill addresses these issues, by bringing in a new uniform Code.
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