AN OVERVIEW OF

INSOLVENCY AND
BANKRUPTCY
 What is Bankruptcy?

 Bankruptcy is a process that allows consumers and
business to repay some or all of their debts under the
protection of the federal bankruptcy court. For most
part bankruptcies can be divided into 2 types-
a) Liquidation
b) Reorganization
 The code

 The Code offers a uniform, comprehensive
insolvency legislation encompassing all companies,
partnerships and individuals (other than financial
firms). The Government is proposing a separate
framework for bankruptcy resolution in failing
banks and financial sector entities.
 Key Changes

 Application for insolvency can be made by financial
creditor or operational creditor, but decision making
is in the hands of financial creditor.
 Financial creditor are voting at par.
 Scope of professionals like CA/CS/CWA/Lawyers
has been enhanced.
 Fragmented status have been clubbed into one.
 Individual Bankruptcy gets included.
 Advantages

 Discharge from bankruptcy clears most debts.
 Once a debtor is declared bankrupt, most unsecured
creditors are unable to pursue further legal action
(although in rare cases the courts have allowed creditors
to continue with court action).
 When a person who has a number of debts and is being
harassed by creditors to pay these debts, the pressure on
the debtor can be almost unbearable at times. Generally
speaking, the harassment will stop once the person enters
bankruptcy. All further communications regarding the
debts should take place between the creditors and the
bankrupt’s trustee in bankruptcy.
 Advantages of
Bankruptcy

 Getting bankrupt is in no way a desirable state, but it’s not a dead end too.
You lose self-confidence and sense of direction, but you can make a
comeback with careful planning. Few advantages of filing bankruptcy are
discussed below:
 Mental Peace
Suicide cases as a result of creditor harassment or murder of debtor by
offensive creditors are quite common now a day. In either case, financial
stress relating to the situation prompts debtor to choose the wrong path. If
debtor files for bankruptcy, he can avoid stress and harassment at the same
time.
 Opportunity to Restart
Before filing for bankruptcy, your focus remains on creditors and you do
not have time for planning. Even though all your assets are gone, you still
possess your skills and intelligence. As your debts are written off post
bankruptcy, you can concentrate on your future plans
 Disadvantages

 The ability to access credit will be difficult to obtain
for a period of time after bankruptcy. This is partly
because a record of the bankruptcy is added to the
debtor’s credit report and stays there for seven years.
 A permanent record of a debtor’s bankruptcy is kept
with the Inspector General in Bankruptcy. For a fee,
anyone can access these records on an electronic
index known as the National Personal Insolvency
Index (NPII).
 
 The bankrupt may be required to hand over their
passport and must obtain permission from their
trustee to leave Australia (s272, Bankruptcy Act).
Penalties apply for attempts to defeat or delay
creditors by leaving the country.
 Trustees are able to investigate bankrupt’s past
dealings and in some instances will recover property
that the trustee has transferred up to five years
before the date of the bankruptcy.
 
 If a bankrupt does not co-operate with the trustee
and fulfill certain duties (such as notifying details of
earnings and changes of address), he or she may be
dealt with by the courts.
 Bankrupts will lose most of their valuable property.
 Key aspects of the Insolvency
and Bankruptcy Code

 IBC proposes a paradigm shift from the existing ‘Debtor
in possession’ to a ‘Creditor in control’ regime.
 IBC aims at consolidating all existing insolvency related
laws as well as amending multiple legislation including
the Companies Act.
 The code would have an overriding effect on all other
laws relating to Insolvency & Bankruptcy.
 The code aims to resolve insolvencies in a strict time-
bound manner - the evaluation and viability
determination must be completed within 180 days.
 Moratorium period of 180 days (extendable up to 270
days) for the Company. Insolvency professional to take
over the management of the Company
 Continued…
 Clearly defined ‘order of 
priority’ or the waterfall
mechanism.
 The waterfall to render government dues junior to most
others is significant
 Antecedent transactions can be investigated and in case of
any illegal diversion of assets personal contribution can
be ordered by court.
 Introduce a qualified insolvency professional (IP) as
intermediaries to oversee the process
 Establishment of Insolvency and Bankruptcy board as an
independent body for the administration and governance
of Insolvency & bankruptcy Law; and Information
Utilities as a depository of financial information.
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