Briefly discuss the insolvency process.

Insolvency refers to a condition in which an individual or company is unable to pay their

debts. A company's insolvency can result from a variety of factors that cause poor cash flow.
When a company or entity is insolvent, they may contact creditors directly and restructure
debts to pay them off.

When a person or a corporation can no longer fulfill their financial obligations to lenders as
debts become due, they are said to be insolvent. Before entering insolvency proceedings, an
insolvent company or person would most likely make informal agreements with creditors,
such as setting up alternative payment arrangements.

Key highlights of insolvency and bankruptcy code 2016

1. Corporate Debtors: Two-Stage Process

The default should be at least INR 100,000 (which can be increased up to INR 10,000,000) to
start the insolvency process for corporate debtors (by the Government). The Code suggests
two stages that are independent of one another:

A) Insolvency Resolution Process: Financial creditors determine if the debtor's company

is viable to survive and the possibilities for its rescue and restoration during the
insolvency resolution process. The IRP gives lenders a joint tool to deal with a
corporate debtor's overall distressed situation. This is a major deviation from the
current legal system, which places the debtor in charge of initiating the reorganization
process and allows lenders to take separate proceedings for restitution, security
compliance, and debt restructuring.
B) Liquidation: Whether the insolvency settlement mechanism fails or the debtor's
financial creditors plan to wind down and divide the debtor's properties, the debtor
will be liquidated. A corporate debtor can be put into liquidation under the Code
under the following circumstances:
(i) The creditor's committee decides to liquidate the corporate debtor at some
point during the insolvency settlement phase with a 75 percent majority vote
(ii) The creditor's committee fails to adopt a resolution plan within 180 days (or
within the extended 90 days)
(iii) On technical grounds, the NCLT refuses the resolution plan submitted to it.
(iv) The debtor violates the agreed-upon resolution plan, and an affected party
petitions the NCLT to liquidate the corporate debtor.

2. Insolvency Resolution Process for Individuals/Unlimited Partnerships

The Code extends to individuals and unrestricted partnerships in all situations where the
minimum default number is INR 1000 (USD 15) or more (the Government may later revise
the minimum amount of default to a higher threshold). In the event of insolvency, the Code
envisions two distinct processes: compulsory fresh start and insolvency resolution.
The debtor must prepare a repayment plan for acceptance by creditors as part of the
insolvency resolution process. The DRT issues an order binding the debtor and creditors to
the repayment plan if it is accepted. The debtor or creditors may file for bankruptcy if the
plan is rejected or fails.

3. Institutional Infrastructure

a) The Insolvency Regulator: Its duties include I governing the insolvency process and (ii)
overseeing the operation of insolvency intermediaries, such as insolvency practitioners,
insolvency professional organisations, and knowledge utilities.

b) Insolvency Resolution Professionals: Insolvency practitioners are designated as

intermediaries in the Code, and they are supposed to play a vital role in the smooth operation
of the bankruptcy process. The insolvency professional verifies the creditors' statements,
creates a creditors committee, operates the debtor's company throughout the moratorium era,
and assists the creditors in finding an agreement on a revival plan throughout the resolution
phase. The insolvency specialist serves as both a liquidator and a bankruptcy trustee in
liquidation.

c) Information Utilities: The Code mandates that creditors send debtors' financial details to
various utilities on a regular basis. Creditors, mediation experts, liquidators, and other
stakeholders in insolvency and bankruptcy proceedings will have access to this material.

d) Adjudicatory authorities: The NCLT is the deciding body in cases of corporate insolvency
and liquidation. The National Company Law Appellate Tribunal hears appeals from NCLT
orders, which are then appealed to the Supreme Court of India. The DRT is the adjudicating
body for individuals and other entities, with appeals to the Debt Recovery Appellate Tribunal
and then to the Supreme Court.