Any individual can file an insolvency petition if protection from creditors is required being unable to pay the debts. One can even file for bankruptcy in specific circumstances with the help of a lawyer in accordance to the bankruptcy law in India. Filing of insolvency petition is governed by the Provisional Insolvency Act of 1920. According to this Act there is a specific procedure to file insolvency petition in India.
Typically, you can file for an insolvency petition under specific circumstances such as being unable to pay the debts but there are a few specific conditions that you need to fulfill. There are there three specific conditions such as:
- Debts must amount to more than Rs.500
- The individual is imprisoned or is under arrest in execution of a money decree and
- There is an order of attachment substituting against the property in execution of the decree.
As for the creditors, they too can file for insolvency petition when the following three conditions are fulfilled:
- The total amount of debt due to the creditor must be more than Rs.500
- The debt must be already due or at any other future date and
- The insolvency petition is filed within three months after the act of insolvency has been commissioned.
These petitions can be filed according to the insolvency and bankruptcy code at a district court that is within the jurisdiction in which the debtor lives or carries on his or her business. However, if the debtor is arrested or imprisoned already, the insolvency petition can then be filed where the person is in custody.
The court processes
The court will proceed following the bankruptcy and insolvency act to the last word. Once this petition is filed, the Court will then appoint an interim receiver. This is done after the presentation of the insolvency petition or prior to the order is made by the court. While making the order of adjudication the assets of the insolvent person will vest with the official receiver or assignee. This property is the liquidated and the proceeds are divided among the creditors.
The distribution of assets of the insolvent individual are implemented by the bankruptcy law lawyer according to the judgment passed by the court. This is done according to the priority of debts and is provided by the Provincial Insolvency Act of 1920. According to this Act, there are few specific dues that gain the highest priority with respect to all other types of debts.
Types of debts prioritized
According to the insolvency law in India the first type of debt that is cleared is the one owed to the local government or any other local authority.
- The first category also includes debts such as salary or wages not exceeding Rs.20 of any servant, clerk, or laborer for their services rendered to the insolvent person for at least four months before the date of presentation of the insolvency petition.
- The next debt that is cleared is the rent that may be due to the landlord but that amount should not exceed a month’s rent only.
When these payments are made, all other debts owed by the insolent person in the insolvency petition are paid consequently and ratably. These are paid according to the amount of debt owed and the insolvency and bankruptcy law does not allow any preference among the creditors.
After the order of adjudication is passed and the report from the receiver or official assignee is taken into consideration, the court will typically grant the absolute order of discharge. This order of discharge will release the debtor from all the debts that were payable but not the dues that are due to the Government. It will also not include any debt incurred due any fraud or fraudulent activity that amounts to breach of trust.
To file for bankruptcy
There are specific rules to file for bankruptcy that may be complicated. It is for this reason you should work with a competent lawyer from the NCLAT Delhi so that your prime objective to file for bankruptcy which is to get an opportunity to start afresh and plan for your future, is achieved.
At this point you must know that no matter how much a bankruptcy or insolvency petition may relieve you from your debts, it will not go down well with your credit ratings. It will be hit significantly and make it really difficult to get a new loan and start a new business.
The steps to follow
The company law appellate tribunal formulates the steps that one should follow while filing for bankruptcy. These include:
- File the petition with the national company law appellate tribunal India
- The insolvency professional will take control from there to assist the defaulting company or individual in the process
- A separate creditors committee is formed to look into the interests of the lenders as well as all other parties involved
- A time period of 180 days is allowed to the lawyer to find a suitable and feasible solution to the default issue
- This timeline can be extended by the NCLT India by another 90 days and
- A liquidator is appointed if the case is not resolved within 270 days.
The defaulter is also allowed to opt for voluntary liquidation within this time period and after the insolvency petition has been filed.
The entire process, right from the filing to the distribution of assets is done under the close supervision of the national company law tribunal India to ensure that no rights are violated.