A CRITICAL STUDY OF THE INSOLVENCY AND BANKRUPTCY CODE OF INDIA

Abstract

India faced challenges due to a fragmented legal framework regarding insolvency and
bankruptcy, before the implementation of the Insolvency and Bankruptcy Code (IBC),2016
characterised by multiple rules and procedures applicable to different entities, including
individuals, partnerships, and corporations. The fragmentation led to inefficiencies in the
resolution of insolvency cases, resulting in slow and inconsistent outcomes. Concurrently, the
nation faced the challenge of addressing the increasing volume of non-performing assets
(NPAs) within its banking sector. Non-performing assets (NPAs), defined as borrowers who
are unable to repay their loans, not only impose financial strain on banks and other financial
institutions but also pose a threat to the stability of the banking industry and hinder overall
economic growth. The Insolvency and Bankruptcy Code seeks to reform the fragmented
framework for corporate insolvency. The plan is designed to enhance the flow of credit across
India and to instill confidence in creditors regarding the prompt resolution of claims. The
objective is to unify existing individual insolvency and debt recovery legislation along with
corporate regulations into a single comprehensive law. The Insolvency and Bankruptcy Code
(IBC) represents a thorough legislative framework in India designed to tackle matters
concerning insolvency and bankruptcy. The Insolvency and Bankruptcy Code (IBC) 2016
represents a significant piece of legislation in India, fundamentally reshaping the approach to
insolvency management by establishing a thorough framework for addressing distressed assets.
This code offers a detailed overview of the intricate processes and regulations established
within the IBC for the management of debtors. The primary objective of the IBC is to facilitate
the early resolution of insolvency, thereby enhancing the value of distressed assets and creating
a conducive environment for business growth. This research paper presents a comprehensive
overview of the IBC, detailing its objectives, key provisions, and its influence on the Indian
economy and legal landscape. It also addresses the challenges and criticisms related to the
implementation of the IBC.
Keywords: Insolvency, Bankruptcy, non-performing assets, IBC
 CHAPTER 1: INTRODUCTION

1.1.Introduction
A nation’s economy grows with the increase in the business. Business is the key regulator of
the economic development of a nation as it generates various economic activities without which
the economy would be small and weak. Banks also play a pivotal role in the development of
the economy by providing loans to the business enterprises for their investment in various
projects. Non Performing Assets (NPAs) pose threat to the investment and are recorded on the
Balance sheet of the bank or any other financial institution after a prolonged period of non
repayment of the loan by the borrower over a period of 90 days and hence, they place financial
burden on the lenders. This affects the lender’s cash flow by creating problem of scarcity of
funds with the banks. Eventually banks are not in a position to provide credit or they provide
credit at an escalated rate by increasing interest rates and this contracts money circulation in
the economy. Also the deposit interest rates by the banks are decreased to recover the losses
from the depositors. The confidence of borrowers lowers down and hence poses impediment
in investment. Ultimately this results in slowdown of national economy. From the year 2008
the NPAs of Banks grew at an alarmingly steep rate. Hence, it became very important to resolve
and prevent NPAs.
Businesses are driven by the entrepreneurs and they need conducive business environment of
free entry and exit. The Indian economy allowed free entry and free competition but it did not
allow free exit and so, there existed several zombie entities in the economic system. The
creditors are providers of credit to the entrepreneurs for establishing and running a business.
The cases from the forums yielded hardly 10-20% of the value of assets and the position of
unsecured creditors was dismal. The unsecured creditors could not get anything out of the
earlier processes. The position of the creditors was pathetic as they had no surety of getting
back their dues and also were not heard in the liquidation and winding up process. The
defaulting companies and their erring promoters continued to be the owners and retained
control over the assets a management of the company in the liquidation and winding up
proceedings. Even after defaulting the erring promoters used to regain control over the
company at an exceptionally discounted price through back door entry. The rest of the
stakeholders were the worst sufferers (such as, the employees and the workmen, etc) because
they got nothing in these processes.
A new chapter in the history of bankruptcy resolution in India began in 2016 with the passage
of the "Insolvency and Bankruptcy Code" (IBC) law. Due to this modification, India's
insolvency regime is now Creditor-in-Control rather than Debtor-in-Possession. The Finance
Ministry referred to this as the "biggest monumental economic reform" in the nation. For the
first time in Indian history, all of the post-independence insolvency laws have been
consolidated under one roof. This code s primary goal is to quickly resolve stressed assets,
which was particularly challenging under previous insolvency laws1. "The 2016 "Bankruptcy
and Insolvency Code" Despite the establishment of multiple committees to achieve this, the
only act that fully alters insolvency laws is (the report of the Bankruptcy statute modifications
Committee, Volume I). The issue of rising non-performing assets was beginning to worry the
administration.
Due to the procedural delays in previous insolvency processes, there were more distressed
assets. The lack of proper insolvency plans in India is one of the main reasons for the increase
of non-performing assets (NPAs). Rag (2008). Before the Indian Bankruptcy Code (IBC), the
amount of money that could be recovered in insolvency cases in India was only 26 cents for
every dollar, and court cases might take an average of 4.3 years to complete. The 'Insolvency
and Bankruptcy Code' (IBC) was implemented in 2016, which has resulted in a reduction of
the insolvency resolution period to 1.6 years and an increase in recovery rates from 26.5% to
71.6% (2016–19), but a decline in recovery rates from 71.6% to 56.3% (2019–2022)2 .
In 2020, India's position among 190 countries for ease of doing business increased from 100 to
63. Likewise, India's standing in the settlement of bankruptcies strengthened in 2019 from 56
to 52 (Ministry of Corporate Affairs: Year End Review 2019)3 . Prior to IBC, the rate of debt
collection was about 26%, and it took more than four years to resolve a case. IBC changed that.
As of right now, operational creditors have an average recovery rate of 49% and financial
creditors have an average recovery percentage of 43%. The average time under IBC is currently
1.6 years, as opposed to 4.3 years in the past. After the IBC, the cost of resolution dropped
from 9% under the old resolution regime to 1%.

1.2.Literature review

● Singh, V. K. (2021) defined that the Insolvency and Bankruptcy Code (IBC), and in
special the Corporate Insolvency Resolution Process (CIRP), has surfaced as one of
India's greatest effective restrictions for a variety of reasons, and this paper will
examine these reasons and reveal the major factors that have contributed to the Code's
 success thus far. The quote from Paulo Coelho, "When you desire something, the whole
universe conspires to help you get it," appears to be a good fit for IBC. In the six years
since the establishment of the Expert Committee on the issue in August 2014, there has
been a significant change in the legislation, policy, and practice in dealing with financial
difficulty. The reference points have shifted to the point where a debt default, which
was formerly deemed commonplace before the IBC, is now a huge issue for businesses.
It has aided in the development of a 'culture of compliance,' often known as the 'modern
corporate bankruptcy system.' The present regime is marked by a shift from "debtor-in-
possession" to "creditorin-possession," clarity on the concepts of "default" and
"financial creditor," and a predictable framework of quick, efficient, and equitable
settlement. The Code's institutional pillars ensure that the CIRP process runs smoothly,
with personnel educated to manage stressed assets as a going concern. A unique
regulator promotes the formation of an environment that furthers the Code's goals. This
presentation will outline the evolution of India's contemporary corporate insolvency
law, explain how the institutional pillars work, and examine some of the important
jurisprudential changes. Finally, certain big issues that need to be addressed or items
on the unfinished agenda will be brought forth. The purpose of this paper is to give a
broad review of India's current corporate insolvency framework.
● Vyas, D. (2021) defined that in this Research Paper on the Insolvency and Bankruptcy
Code 2016 in India, I will address the necessity for the code, its new forms, the potential
causes for delays in its application in recent times, and possible remedies given. In a
company's normally eternal life cycle, closing it down and winding it up as a going
concern is the last thing anyone wants to do (on-going business). However, owing to
internal and external concerns, the firm, which is regarded an artificial person by law,
might become ill, i.e. unable to function. This might be due to a lack of capital, inability
to fulfil its liabilities, revenue challenges, falling earnings, sales, high debt expenses
owing to high interest, inability to meet cash flow or day-to-day administration costs,
terrible economy, or government regulations or policies, among other things. The
corporation will eventually go insolvent. For those who are familiar with accounting,
this signifies that the company's liabilities surpass its assets. Simply said, the amount
owing or potentially payable exceeds the amount received or potentially received. At
this point, one may file for bankruptcy, a legal word that, in layman's terms, refers to
an attempt to get legal assistance in order to pay one's creditors from one's assets of the
firms. After grasping the notion in its most basic form, we must understand that in order
 to achieve the aforementioned goal of a bankrupt firm or individual legally, regulations
or laws must be universally approved and sanctioned, allowing them to be imposed
with a legal sanction that all agree to. As a result, the president signed the Insolvency
and Bankruptcy Code of 2016, which was published on May 28th, 2016. The
insolvency and bankruptcy code of 2016 (hereafter referred to as IBC, 2016) specifies
that it will take effect on the date that the central government notifies in the official
gazette.
● Gupta, S. K. (2021) identified that many commercial companies, start-ups, and small
manufacturing units in India rely on technical expertise to create their operations,
production, marketing, finance, service, and other advisory tasks. Some businesses
operate for a long time, but due to changing circumstances, technological
advancements, production halts, or consumer supply changes, they may experience
financial difficulties in the middle of their operations, resulting in heavy debt burdens
and pressure from lenders to repay their debts. However, non-performing of their
businesses may result in a decline in profit for many years, and they seek to be declared
insolvent in legal form. Alternatively, commercial firms may be faced with a lengthy
legal requirement to close their doors. They feel pressurised by their financiers in such
conditions, and they are unable to start their other businesses.
● Ram Mohan, M. P., & Raj, V. (2021). Defined that the Insolvency and Bankruptcy
Code of 2016 (IBC) provides a reorganization option for troubled businesses. The IBC's
approach to corporate rescue restricts how much a distressed corporation's current
management can participate in its rehabilitation. This is mirrored in IBC 29A, which
exempts founders and existing management of firms with non-performing asset
accounts from filing resolution plans, among other things. Despite the fact that section
29A is found in the IBC, court interpretation has rendered it relevant to company
reorganizations under India's Companies Act, 2013. The creation and use of section
29A reflects a larger skepticism of enabling promoters and directors to reclaim control
of enterprises that have gone bankrupt while they were in charge. This article examines
whether section 29A has solved the challenges it set out to tackle, and concludes that
certain of the ineligibilities imposed on incumbent management under section 29A can
be loosened. It utilizes the example of the United Kingdom's bankruptcy process (which
India shares) to show why the current management's resolution proposals should not be
rejected.
● Khorakiwala, A. A. (2017) mentioned that having followed the catastrophic political
disaster of the Bengal Famine of 1943, India's fruitful countryside underwent a radical
industrialization and a giant biopolitical revolution to supplement agricultural
production, which was aided and abetted through large-scale, top-down architecture
and infrastructure—"quantitative architectures"—that facilitated the emergence of a
monumental landscape. India used a pragmatic approach to decolonization, prioritizing
infrastructure above grandiose architectural form. Architecture was bound between its
cultural project—that is, the endeavor to merge contemporary and traditional
identities— and the drive for modernization—that is, the scientific management of
people and natural resources—as a result of this shift toward progress. The aesthetic
notions that leads to the rise of the urbanization and infrastructure restructuring of
India's northwest—the PunjabDelhi region—are the focus of this study. It looks at how
technocrats gathered and generated transnational and hybrid forms of expertise around
architectural materials like concrete and steel, as well as infrastructure commodities
like water, wheat, and fertilizer, in the quest to keep the Indian body fed. Dams,
warehouses, silos, marketplaces, and colleges, for example, were used to buffer
between a liberal-capitalist drive of expansion and a bureaucratic model of
redistribution, according to one major argument. As a result, these efforts established a
top-down biopolitics by establishing a bureaucracy of rules and expectations to
administer and distribute food rations, thereby moulding the distributionist logic of the
distributionist logic.
● GUPTA, A. (2018). Found that in light of the changes brought about by the Insolvency
and Bankruptcy Code, 2016, delivery and availability in India have changed. The
Code's introduction is intended to address issues in the credit ecosystem by correctly
identifying all stakeholders, particularly creditors and debtors, resolving and settling
non-performing assets, creating a robust mechanism for resolving credit-related
disputes, reducing creditor distrust, and ensuring that companies continue to operate
rather than being wound up for non-payment of debts. While the Code promises to be
a game changer, there are a number of issues that must be addressed, as the Code's
effectiveness is contingent on how its provisions are implemented. Particularly those
with severe deadlines and parties demanding undue discretionary indulgence from
adjudicating authorities. The impact of disparity meted out to creditors, the committee
of creditors being ordained with significant powers over the fate of the corporate debtor,
and insolvency professionals being allowed to run the entities without much
 accountability and capability has resulted in an increase in the number of disputes. The
above-mentioned legal, logical, and procedural roadblocks will need to be overcome in
the near future in the most friendly manner possible.
● Gupta, N., Desai, N., Garg, E. (2020)1, this research paper has attempted to highlight
the background of the Code in the light of the applicable legal regimes before the
implementation of the IBC along with the challenges that were faced in the initial stages
of its implementation. The study also analyzes the impact of the Code on the macro
economy of India with a detailed focus on the effectiveness of the IBC in reducing the
level of NPAs in India. The researchers have evaluated the introduction of IBC as one
of the most effective reform and it has glorified the position of India globally.
● The legal background and development of India's Insolvency Regime are laid out in
detail by Sumant Batra in "Corporate Insolvency Law and Practice" (Eastern Book
Company; 1st Edition, 2017). He analysed the insolvency law process and criticised the
inadequate rescue procedure legislation in India. Key aspects of the new insolvency law
based on international best practises and experience are also discussed.
● Doctoral Thesis by Researcher Pooja Agarwal under the guidance of Divya titled
“Anatomisation of law on Corporate Insolvency with a focus on the Insolvency and
Bankruptcy Code”2 (2022) makes an attempt to find out whether the Insolvency and
Bankruptcy Code, 2016 is a comprehensive and revamped law sufficient to provide
relief to the problem of insolvency existing in the corporate sector. The research is
undertaken to take into consideration the factors which resulted in past legal
frameworks being insufficient and causing delays and latches, inefficiencies and
bottlenecks of the system. The purpose of this research is to focus on the aspects of the
practical implementation of the Code in India. The law has given a 360-degree turn to
the existing framework. This research aims to find whether the Indian Corporate
scenario was prepared for such a drastic turn or not and analyse the positive and
negative changes it has introduced. Further, the researcher aims to check whether the
new code is as promising as it appears to understand the various developments of the
Insolvency and Bankruptcy Code, 2016 and its role in ensuring better corporate
governance in the country. Although, the Code has introduced many changes and a

1
Nimit Gupta, Nimsha Desai and Evanshi Garg, “Impact of Insolvency and Bankruptcy Code on India’s Macro
Economy focussing on Indian Commercial Banks”, Vol 22 Supremo Amicus, 2020, available at:
https://supremoamicus.org/wp-content/uploads/2020/11/Nimit-Gupta-1.pdf (last visited on Jun. 09, 2021)
2
 promising legislation, no law is perfect. Every law has certain lacunae and loopholes
which can be pointed out only once the law is implemented. The study is useful but it
has not provided any empirical testing of the Code.
● “Critical Areas of Concern in the Process of Insolvency and Bankruptcy Code, 2016”
16 (2019). In this article, the author points out the key areas in the Process of CIRP
under the IBC, 2016 and also regular challenges faced on the job. These consist of
specific unanswered questions for smoother functioning of the time-bound
mechanisms. The regulatory authorities need to pay attention to these practical matters
as well, which are causing hindrances and will substantially benefit the resolution
process in the interest of all stakeholders.
● Giridhar, G., & De, S. (2018) mentioned that businesses cannot prosper without
wellfunctioning, stable institutions. The resolution of bankruptcy is one such
institution. Until recently, India's legal system for dealing with such situations was very
fragmented, with overlapping statutes such as the Contract Act, the Sick Industrial
Companies Act, the Companies Act, the Recovery of Debts Due to Banks and Financial
Institutions Act, and so on. Furthermore, the recuperation process was unpredictable
and never-ending. In 2016, India passed the Insolvency and Bankruptcy Code (IBC) to
address this issue. This, along with the GST, is one of India's most significant economic
changes. The IBC was enacted by the Lok Sabha on May 5, 2016, and the President
confirmed it on May 28, 2016. The IBC intends to create a one-stop shop for insolvency
resolution through a time-bound procedure that reduces the cost and time necessary for
liquidation. It also plays a critical role in resolving India's bad loan problem, which
totals Rs. 10 lakh crore. As the pace of resolving ongoing bankruptcy matters among
major corporations heats up, the IBC code is constantly amended. The government's
efforts to refine the law will be critical in garnering the trust of many stakeholders and
ensuring the survival of diverse businesses.
● Doing Business Report, Various issues (2014-2020), the Doing Business Report of the
World Bank studies the business regulatory environment for 189 nations which
includes the ease in starting a business till the easy exit of the business. The various
parameters on which the business regulatory environment are assessed includes closing
a business. The Doing Business Report of 2014 says that the recovery rate is higher
when a distressed business emerges as a going concern than when that business is sold.
Various issues mention that the effective and efficient implementation of the IBC has
 led to the recoveries of the NPAs at a faster rate, maximum recovery of the creditors’
claims, increase in the foreign direct investments, etc.

1.3. Research Objective

● To analyze the historical evolution of insolvency legislation in India leading to the
enactment of the Insolvency and Bankruptcy Code (IBC) 2016.
● To critically examine the key provisions and procedures of the IBC, including the role
of the Insolvency and Bankruptcy Board of India (IBBI) and other stakeholders.
● To evaluate the impact of the IBC on the resolution of Non-Performing Assets (NPAs)
in India, including an analysis of recovery rates, timelines, and challenges.
● To assess the role of the judiciary in interpreting and implementing the IBC through an
analysis of significant case laws and judicial pronouncements.
● To identify key challenges and constraints in the effective implementation of the IBC
and propose recommendations for improvement.

1.4. Research Questions:

● What is the impact of the IBC on the resolution timelines and recovery rates of NPAs
in India compared to pre-IBC regimes?
● How effective have Insolvency Proceedings been in recovering debts in India?
● How has the judiciary interpreted and applied the provisions of the IBC through its
judgments, and what impact have these judgments had on the resolution process?

1.5. Research hypothesis

● The IBC has led to a significant reduction in NPA resolution timelines and an increase
in recovery rates compared to previous insolvency regimes.
● The Insolvency proceedings include delays in the resolution process, judicial
interpretations, and the need for further clarity and consistency in the implementation
of the IBC.
● Judicial pronouncements have played a crucial role in shaping the interpretation and
application of the IBC, impacting resolution outcomes and providing guidance to
stakeholders. I hope this framework is helpful!

1.6. Significance of study

The study focussed on understanding the need of a comprehensive legislation to deal with
insolvency and bankruptcy in India. As a young republic nation with a dynamic
entrepreneurship environment, our nation s economic capability has often been termed as
sleeping elephant . A significant example in this regard is that in India the disputes relating to
repayment of debts took a very long time to settle. In fact, we fell in the category where the
time taken and expense incurred in the dispute resolution was one of the highest as per the
world standards. However, India in its endeavour to become a more inclusive and mature
market has always evolved to meet the world standards and the well drafted legislations along
with organisational infrastructure has helped in achieving its objectives. Following the same
principle, the Ministry of Finance by setting up the Bankruptcy Law Reform Committee under
the chairmanship of Dr. T. K. Vishwanathan laid the foundation of the modern law on
insolvency and bankruptcy, i.e., the Insolvency and Bankruptcy Code 2016. The Code
established the legislative framework which helped in efficient and timely settlement of debt
related disputes along with the focus on the revival and restructuring of companies as a going
concern. The researcher has focused on two important aspects. Firstly, on the mechanism of
revival of business under financial distress and its easy exit if revival was not possible.
Secondly, to understand the impact of the IBC 2016 on the Banking Sector and its reduction in
the NPA s. Moreover, these aspects are correlated because revival of a company or its efficient
exit leads to better utilisation of resources of the economy and reducing the burden of the NPAs
on the economy. Since, the IBC 2016 is still in its infancy, the research has helped to better
understand the need of continuous amendments in the Code and what are the lacunas which
are still needed to be addressed.

1.7. Research Methodology

While conducting research for this thesis, a combination of theoretical methods will be used.
The researcher will consult a variety of secondary sources. Secondary data is gathered from
published material on the subject from a variety of sources, including the Reserve Bank of
India Annual Report, monthly bulletins of the RBI, Articles and research papers published in
the journals of the Indian Bank Association, Indian Institute of Bankers, National Institution of
Bank Management, Institute of Chartered Accountants, Insolvency and Bankruptcy Board of
India (IBBI), Books and Internet.
1.8. Tentative chapterization

CHAPTER 1 : Introduction

The introductory chapter offers a synopsis of the research, commencing with an abstract that
encapsulates the aim of the study. The chapter starts with a comprehensive introduction
elucidating the topic's importance, with specific emphasis on the volition of Insolvency laws
in brief and then dealing with the implementation, and impact of Insolvency and Bankruptcy
Code. The literature review rigorously evaluates prior research, emphasising gaps that's needs
to be addressed in the present research. The research objective, scope and gaps are provided,
specifying the goal of present research and possible constraints. The research question and
hypotheses are provided, outlining the questions the study intends to answer, succeeded by the
method of research used for collecting the data.

CHAPTER 2 : Insolvency and Bankruptcy in India – Historical Perspective

Chapter 2 offers a historical analysis of insolvency legislation in India prior to the

implementation of the IBC, encompassing previous statutes like the Sick Industrial Companies
Act (SICA) and unsuccessful rehabilitation initiatives. It examines the necessity for the IBC to
tackle the escalating issues of handling NPAs and the inadequacies of prior frameworks. The
chapter delineates essential aspects of the IBC, encompassing its novel provisions, the function
of the Insolvency and Bankruptcy Board of India (IBBI), and its responsibilities.

CHAPTER 3 : Legislative framework- Insolvency and Bankruptcy and related laws.

This chapter deals with the legislative framework of the Insolvency and Bankruptcy related
laws. it highlights the various important provisions related to designed to tackle matters
concerning insolvency and bankruptcy. It gives a detailed overview of the intricate processes
and regulations established within the IBC for the management of debtors. It also highlights
how IBC facilitate the early resolution of insolvency, thereby enhancing the value of distressed
assets and creating a conducive environment for business growth.

CHAPTER 4 : Implementation, and impact of Insolvency and Bankruptcy Code..

Chapter 4 evaluates the influence of the IBC on the insolvency and bankruptcy process,
providing a study of the alterations in the NPA landscape prior to and subsequent to the IBC's
adoption. This chapter examines the impact of the IBC on recovery rates, the efficacy of the
resolution process, and how effectively it manages the same. It also analyses the legal and
regulatory problems encountered throughout the implementation of the IBC, offering a critical
assessment of the obstacles to effective NPA resolution.

CHAPTER 5 : Role of judiciary in the Implementation of IBC

This chapter delineates significant rulings and case studies pertaining to the IBC, providing
insights into the practical application of the code. The case studies and judicial rulings illustrate
the practical effects of the IBC on insolvency resolution and NPAs, highlighting triumphs,
obstacles, and legal interpretations that have influenced the code's execution.

CHAPTER 6 : Conclusion and suggestion

The last chapter encapsulates the research findings and offers recommendations for enhancing
the efficacy of the IBC in addressing NPAs and other issues. It delineates prospective
developments in insolvency law, implementing potential revisions aimed at enhancing the
efficiency of the resolution process. The conclusion summarises the research contributions,
evaluates the IBC’s effect on NPAs, and presents recommendations for policy enhancements.
The bibliography enumerates all sources cited in the research.
 CHAPTER 2 : INSOLVENCY AND BANKRUPTCY IN INDIA – HISTORICAL PERSPECTIVE

2.1. Introduction
Insolvency is the state where a person or a business otherwise a debtor, is unable to pay the
debts, at maturity. The person or a business who is in a state of insolvency is said to be
insolvent. Insolvency can be categorized into Actual Insolvency and Technical Insolvency.

Actual Insolvency refers to a situation, where a person or a business does not have the
appropriate cash to make the payment, but has enough assets (non-cash or fixed assets) to pay
what is owed. This situation is also referred to Cash-flow Insolvency.
Technical Insolvency on the other hand is when a person or business does not have enough
assets to pay all the debts they owe. This is also referred to as Balance-Sheet Insolvency. When
a person or a company is technically insolvent, then the debts must be paid off by restructuring
the payment process with the help of the court order that will decide as to how the insolvent
debtor’s unpaid obligations are dealt. This legal status is what is known as Bankruptcy.
Bankruptcy is always preceded by Insolvency, but Insolvency does not always lead to
bankruptcy. A business can be insolvent without being bankrupt, but a business cannot be
bankrupt without being insolvent.

2.1.1.Causes of Insolvency:
The main cause of insolvency is poor financial management, there are multiple reasons like,
loss of capital, loss of revenue, loss of cash inflows, loss of credit and all these stems from poor
financial management. Though we are aware of these issues, we often fail to address them
properly. If the problem drags on, things get out of control, and leads to insolvency. It may also
happen that one is already insolvent and they were not aware of it.
The following are some of the causes of insolvency:
• Lack of proper financial planning or cash flow planning
• Excessive borrowing to fuel the business growth
• Depending on few customers
• Over-reliance on an employee
• Underestimating the competition
• Lack of knowledge to run the business
2.1.2.Signs of Insolvency:
If the business is undergoing any of the following situations, then it could be the sign that
business might be insolvent or is going to be insolvent:
• Persistently late in making bill and debt payments
• Making use of debt to pay off the other debts
• Delays in paying the salaries to staff
• High rate of employee turnover
• Maintaining only minimum cash balances in banks
• Disposing non-cash assets in order to pay the obligations
• Increase in bad debts or failure to collect majority of account receivable
• Loans at maximum credit limit
• Loss of service providers or suppliers

2.2 Overview of Indian Insolvency & Bankruptcy Schemes

The journey to reach IBC has not been easy, but has been followed by the various laws and
enactments, the experiences of which have made a path to IBC. Reserve Bank of India (RBI)
and the Central Government have taken various initiatives to help banks manage the stress
effectively. This is not the first time that banking sector encountered NPA problems; history
shows that every time such problems happened, new institutions or instrumentalities were set
up to support the banking system. The 1980s gave birth to Board for Industrial and Financial
Reconstruction (BIFR) and 1990s created Debt Recovery Tribunals (DRT). However, NPA
issue became acute by FY 2001 when gross NPA reached close to 14% of the total banking
credit. The year 2002 is considered a watershed year when a three-pronged strategy was put
together, namely,
(a) empowering banks to enforce security through SARFAESI Act,
(b) introduction of Corporate Debt Restructuring (CDR) mechanism and
(c) introduction of Asset Reconstruction Companies (ARCs) to acquire the toxic assets off the
balance sheets of banks.