Bankruptcy
Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT
Meaning
Bankruptcy is a legal status. An adjudicating authority declares it for a person or firm that is insolvent. For companies, the adjudicating authority is the NCLT. For individuals, it is the DRT. Insolvency is a financial condition: being unable to pay debts as they fall due. Bankruptcy is the formal legal declaration that follows from that condition. India's Insolvency and Bankruptcy Code (IBC) 2016 deals with both. It replaced the older SICA/BIFR system of 1985.
Example
A shopkeeper cannot pay suppliers or the bank as dues fall due. At that point, the shopkeeper is insolvent. The shopkeeper becomes bankrupt only when the adjudicating authority formally declares it through legal proceedings.
Don't confuse with
- Insolvency: this is the financial condition of being unable to pay debts as they fall due. Bankruptcy is the legal status that a court or tribunal declares. A firm can be insolvent without having been declared bankrupt.
- Liquidation: this means selling a company's assets to pay creditors. It is one possible outcome of the insolvency process, not the same thing as the legal status of bankruptcy.
Related concepts
- Insolvency
- Corporate Insolvency Resolution Process
- Committee of Creditors
- Resolution professional
- Liquidation waterfall
- Haircut
- Pre-packaged insolvency
- Financial and operational creditors
- Cross-border insolvency