‘Insolvency’ in India
The dictionary meaning of Insolvency is ‘the lack of financial resources’ and in legal terminology, it refers to ‘the situation where the liabilities of a person or firm exceed its total assets’.
Insolvency in practice means - a situation where a person or a company is not able to raise enough cash to meet its obligations or pay its debts on time leading it to ‘payment due’.
Insolvency is also a law that comes into force when an entity (individual or corporate body i.e. Company, Firms, LLP etc) fails to repay its debt to its creditors. This may be due to the overspending of that entity or due to the losses suffered under his/her personal or work capacity.
Let us take an example to understand the concept in detail.
If you are an individual with a good business or a decent salaried job and you manage to earn around 75,000 on monthly basis. With this salary, you dream of a good life and decide to buy yourself a house, own a good car and build a farmhouse as well. In order to fulfil your dream of owning all these liabilities, you take a loan from the bank to fund each of your purchases separately i.e. the flat, car and land for the farmhouse.
For few months, things go smoothly with you earning 75,000 and paying off the EMIs on a timely basis. But unfortunately after few months there comes a slag in your earning (may be due to the downfall in your business or economic crises) and you are forced to shut down your business or are fired from your job. In addition, you are unable to start your business again due to lack of funds or fail to find a good job due to the scarcity of opportunities. This scenario puts you in the situation of insufficiency of funds to take care of your family, meeting with your day to day expenses and repaying of your debts i.e. all the loans taken from the bank/s.
The Bank/s will send you legal notice to repay the debts (loans) taken by you. If after few warnings you are still not able to repay your debts than in such a condition, the bank will declare you as an insolvent.
When a person is considered as insolvent, all his bearings (properties) go into liquidation by the bank to obtain their funds back. Under the charge of insolvency, the banks will forfeit all the properties (your house, car as well and the land along with all construction work done over it) pledged by you for the said loan and will put them for auction to reclaim the amount given to you by the bank/s. This situation of liquidation of one’s property to regain the debts is called as insolvency
Insolvency can not only be done by banks but this right is available to anyone who is your creditor. Although, they cannot do it directly, your creditor can approach the District Court to get back their funds from you and attach your assets to reclaim their debts.
A similar situation is applicable to the Corporate Entities too. And the same procedure will be applicable to them if they fail to repay their debts or fulfill their financial obligations.
P.S. The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.
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