Bankruptcy is a legal process by which individuals or business organization seek relief from their creditors when they are not able to repay their debts. The bankruptcy law in India is governed by the Insolvency and Bankruptcy Code 2016 which was formulated by consolidating all the pre-existing bankruptcy and insolvency laws which were proving to be inadequate and ineffective. The earlier laws took a lot of time and were not economically viable as well. The new code aims to resolve bankruptcy cases within 180 days.

Both debtors and creditors can file for insolvency. Irrespective of who files the case there are certain restrictions that come into play regarding the business activities of the debtor and the recovery process for the creditor. Individuals and partnership insolvency are adjudicated by the Debt Recovery Tribunal, whereas for corporates, National Company Law Tribunal is the Adjudicating Authority. If the insolvency resolution process fails to come up with the mutually acceptable resolution plan, the defaulting entity is declared bankrupt and its assets are liquidated to pay off the creditors.

If the assets are liquidated, creditors are paid back in the order of priority as laid down by the IBC. The Code’s order of priority stipulates that the outstanding amount of the secured creditors be paid first, then the unsecured creditors. Government dues are to be paid last.

Things a Creditor Should Do

Once a client (debtor) files for bankruptcy, certain restriction are automatically invoked under the bankruptcy law in India. Obviously, creditors are worried about recovering their money, but you have to tread cautiously as to not violate any provision. If you are found to be violating any norm you might be sued. We will discuss hereunder certain steps that must take if your client has filed bankruptcy.

Stop all Contact

Once bankruptcy is filed you must stop your recovery attempts. If you try to make contact with debtor in connection with recovering your dues, that would be a violation of the bankruptcy code and will be liable to be sued for that. Even if you have a lawsuit pending against the client, it gets stayed till the bankruptcy proceedings are on. However, you can contact the debtor’s lawyer or the adjudicating authority appointed Insolvency Professional. If in the bankruptcy filing you are not named as a creditor, then you are free to pursue the debtor to recover your dues.

Do a Cost Benefit Analysis

Assess the situation to determine whether it is even worth pursuing the client to recover your dues. For instance, if the debtor’s liabilities far exceed its non-exempt assets and there are a number of creditors, it is very unlikely that you will be able to recover your dues. Based on the facts, you have to decide whether it would be worth spending your time and money on the exercise. Generally, individuals and small business entities do not have enough assets that can be liquidated to pay off the creditors.

Assess the Situation

If the case is under insolvency resolution stage, chances are a restructuring and repayment plan would be worked out. The debtor is exempted from making immediate payments to its creditors, but a delayed repayment plan is drafted. If the insolvency resolution has failed and the assets are liquidated the recovered amount is proportionately distributed among the creditors.

File a Proof of Claim

After getting the bankruptcy notice the first thing you need to do is file a proof of your claim within the stipulated deadline. Failure to do so within the given deadline will diminish your chance of recovering your dues. Proof of claim is a simple form which you can fill yourself and submit it with the adjudicating authority. There is no need to consult a bankruptcy law lawyer.

Wait for the Proceedings to Get Over

After you furnish all your financial details you have to wait for the insolvency proceedings to get over. The stipulated time for resolving a case is 90 days with a possible extension of 45 days for individuals and partnerships, and 180 days with a possible extension of 90 days for limited concerns. During this period the Insolvency Professional along with the applicant analyses all the financial data available to come up with a resolution plan that may include financial restructuring and debt refinancing plan and the provisions made to repay the creditors.

Creditors’ Committee Meeting for Approving the Resolution Plan

The resolution plan prepared by the Insolvency Professional is put to the creditors’ committee for review and approval. If the plan is approved in its entirety or with some modifications by a majority vote of the creditors, it is sent to the adjudicating authority for approval and implementation.

If there is disagreement among the creditors on the financial viability of the resolution plan and the plan is not approved, the decision is conveyed to the adjudicating authority who shall then initiate the liquidation process. 

The amount realized by liquidating the assets of the debtor is used to pay the creditors in the order of priority as described by the Indian bankruptcy law.
Filed November 16th, 2019 under legal