The Difference between Voluntary and Involuntary Bankruptcy by Sini @LexCliq

Bankruptcy can be complicated and overwhelming for a person or a company. It may sound difficult to get over a debt trap but it has become attainable with the arrival of the Insolvency and bankruptcy Code. The solution to bankruptcy has to be two ways:

(i) Voluntary Bankruptcy; and

(ii) Involuntary Bankruptcy.

A debtor can choose to go for voluntary bankruptcy if he has a reason to believe that he is not apt to satisfy his debts. Another way for debt recovery is involuntary bankruptcy, which the creditors perform.

Background

Initially, bankruptcy was designed to restore the creditor’s financial value. It ultimately grew and voluntary bankruptcy came to the fore, helping debtors to relieve themselves of their debt trap.

This stigma primarily existed in regard to firms who could not pay their creditors’ debts. It was even referred to as unethical and was morally subject. That view altered considerably with time when cash flow grew in the Indian economy. Cases of bankruptcy have grown with thriving incomes and more cash interchange. A strong law was therefore needed to address these defaults.

In 2015, Dr. TK Viswanathan chaired the Bankruptcy Law Reform Committee. The Committee focused primarily on reviewing the existing policies and developing a coherent insolvency and bankruptcy structure for individuals and other legal organisations. In November 2015, the Committee presented its report to Late Shri Jaitely, then Minister of Finance. On 21 December 2015, Shri Jaitely presented the Lok Sabha report.

On 23 December 2015, the report was also submitted to the Joint Committee. In Lok Sabha and Rajya Sabha, on 5 May and 11 May 2016, the Insolvency and Bankruptcy Code was effectively adopted, with a majority. The code was also approved by the Chairman

The Insolvency Law was introduced in 2016. The Bankruptcy Code, 2016 (IBC), has modified the way corporations seek aid on insolvency and debt decisions. Insolvency Code, 2016. The preference for bankruptcy was to take a loan from banks, which used to be the most popular credit culture. Nowadays, bankruptcy of outstanding debt solutions is a frequent activity of a company or individual.

The concept of bankruptcy

In Layman’s terminology, bankruptcy can be defined as a legal process in which a person or corporation unable to pay their creditors’ existing debts receive a debt relief. Failure is a legal status in which the outstanding obligations of an enterprise, an individual or an organisation to the creditors cannot be compensated. If the corporation, firm or organisation is unable to pay its loan back and the liabilities ratio is considerably higher than its assets, an insolvency procedure is launched. Debt failure to pay can lead to mental distress and a general illness, which needs to be remedied for a company and individual to perform properly aynd defend their rights.

 

Involuntary v. voluntary bankruptcy

Involuntary and voluntary are two different ways in which bankruptcy proceedings take place. The Insolvency and Bankruptcy Code of India underpins the said two procedures of bankruptcy. Voluntary bankruptcy far and away is the standard method of resolving bankruptcy, wherein the debtor initiates the process. Involuntary bankruptcy apparently is rare and is initiated by the debtor’s creditor. Below is the differentiation between voluntary and involuntary bankruptcies based on their meaning, objective and scope, process, and roles and responsibilities.

Meaning of voluntary and involuntary bankruptcy

Voluntary bankruptcy

  • There is no particular definition of voluntary bankruptcy, but precisely it is bankruptcy declared upon petition of the debtor. In voluntary bankruptcy, the debtor himself goes for bankruptcy when there is a financial distress and has a reason to believe that he won’t recoup from such debt.
  • The debtor files a petition with a court to proceed with the bankruptcy. This is also known as ‘Debtor’s Petition’. When the debtor himself files a petition, it intends that the assets belonging to him, be it his personal property, will be sold out to pay off the creditor or creditors.

Involuntary bankruptcy

  • Involuntary bankruptcy is a process by which the creditor requests the debtor to go for bankruptcy. Bankruptcy is made involuntarily when the creditor is not optimistic about the recovery of his money.
  • This is one of the powers given to the creditor that is to force an unwilling debtor to go for involuntary bankruptcy. The creditor can commence the involuntary bankruptcy against the debtor by filing a petition. If the number of creditors is 12 or less, a creditor alone can file a petition. If the number of creditors exceeds 12, the creditors collectively can file a petition against the debtor.

Objective and scope of voluntary and involuntary bankruptcy

  • The objective behind voluntary bankruptcy is to allow the debtor to set free from its debt and reconstruct itself to start a new life. Plus point about voluntary bankruptcy is that it restrains the creditor from taking any action against the debtor. All the petitions against the debtor are kept on hold till the resolution is complete. Once the petition is filed for bankruptcy, an automatic stay is imposed on the debtor. Automatic stay restrains any action or judgment against the debtor.
  • There are situations where the debtor denies to pay even though he is competent to pay back. Involuntary bankruptcy allows the creditor to take legal action against the debtor and compel the debtor to pay it back. Once the petition gets accepted by the competent court, the creditors are repaid by the debtor’s available assets.
  • We can thus conclude two-fold purposes of the bankruptcies mentioned above, ie:
    • To provide relief to the debtor from harassment of his creditors; and
    • To protect the creditors who aren’t being paid back by their debtor.

 

Roles and responsibilities in voluntary and involuntary bankruptcy

  • The debtor files voluntary bankruptcy in his capacity in a court. The document shall assert that the debtor will not be able to pay his debts, resident of the debtor or where the business is conducted, details of court orders if the debtor is arrested, details of claims against the debtor, and address of creditors.
  • Involuntary bankruptcy is initiated by the creditor by filing a petition with the court. While the creditor can initiate bankruptcy against an organization or a company, it cannot do this against an individual person.
  • Once the application is admitted, the court assigns the officials to hold the property and assets of the defaulting company or debtor. The investments are then distributed to the creditors accordingly. This process discharges the company’s bankruptcy when the creditors get satisfied and give the company a new life.
  • The National Company Law Tribunal(NCLT) initiates a corporate resolution process (CIRP) in the event of default on making payment by the company to creditors. The financial creditor, operational creditor, or corporate is competent to apply to NCLT also known as Interim Resolution Professional (IRP) for initiating insolvency resolution process in the occurrence of non-payment.

Process of bankruptcy under the Insolvency and Bankruptcy Code, 2016

  • As per the Insolvency and Bankruptcy Code, 2016, the process of debt resolution can be initiated by any creditor, whether it is a financial creditor or an operational creditor.
  • The Code also allows application for resolution by the debtor itself. If the debtor files an application for resolution, he shall also file an application showing the consent of the Board of Directors.
  • The two processes provided under the Insolvency and Bankruptcy Code, 2016 are:
    • The Corporate Insolvency Resolution Process;
  • In the Corporation Insolvency Resolution Process, the creditors are required to assess the business’s worth as to whether a business can be recovered or not. When the resolution process fails, the creditors decide on selling the company’s assets to recover their share of dues. The value of default should be more than one lakh INR.

Applicability of the Insolvency and Bankruptcy Code, 2016

The provisions of the IBC are applicable in bankruptcy in the following entities:

  1. A company incorporated under the Companies Act, 2013 or any previous laws;
  2. A company governed by any Special Act, provided such provisions are not inconsistent with the Special Act provisions;
  3. Limited Liability Partnership under the LLP Act of 2008;
  4. Partnership firm and individual;
  5. Any other body incorporated under any law which the Central government will designate for the said purpose.

 

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