Insolvency is a process in which a debtor is unable to pay off its debts. Bankruptcy on the other hand is pronouncement of an order by the court that an individual is unable in paying its debts. It in simple words can be called a court declaration. There is a thin line of demarcation between insolvency and bankruptcy. Not all insolvencies result into bankruptcy. Insolvency is considered as a financial state of a debtor and bankruptcy is considered as a legal position of an individual. An individual, organization, corporation, if they are not able to pay its debts. They are considered as insolvent. Bankruptcy is a quiet different process. In some cases, even debtors’ personal assets are attached by the court against its obligations.

A Debtor is declared as a bankrupt by the tribunal, it is a legal status provided by court of law. Unlike insolvency, a person can be declared insolvent without the intervention of court. A debtor undergoes a legal process after being declared as an insolvent, in anticipation of seeking some relief from the court. Bankruptcy word is arrived from an Italian term-ology ‘banca rotta’[i] meaning broken bench. Each country has a different perspective on bankruptcy.

Bankruptcy Process from global point of view[ii]

According to USA law, bankruptcy can be considered only in case of companies, organizations, or corporations. It can also be defined as a procedure in which debtors seek legal help to reorganize their debts. So that they could fulfill its liabilities.

Contrary to the USA law, the UK law states something completely opposite to it. According to the UK laws bankruptcy applies only in cases of individuals and partnership firms and not otherwise. The law states two situations for bankruptcy-

1. An individual unable to meet its liabilities can be declared as a bankrupt.
2. A creditor can also file for declaration of bankruptcy of an individual.

Bankruptcy according to Indian law covers all individuals, corporates, firms etc. whosoever is financially incapable of paying off its liabilities are covered under bankruptcy. According to Insolvency and bankruptcy board of India, 2016 only tribunal can order bankruptcy. When the debtor is not in the position to pay creditors debts. It is considered as sickness and it needs to be revived.

Procedure of bankruptcy followed in UK[iii]

In United Kingdom, bankruptcy is divided into two separate legislations. One applies on England and wales and other applies on Scotland and Northern Ireland.

In Scotland bankruptcy is known as sequestration. The institution responsible for authorizing the process is called the accountant in bankruptcy according to Scotland law. There are substitutes to bankruptcy process, which help debtors in dealing with their financial issues. there are different authorities which provide free of charge professional guidance to provide some relief to those in need.

In England and whales, bankruptcy is covered under part IX of insolvency act 1986 and amendments and insolvency rules 1986 and amendments. According to the act- bankruptcy can be filed by the debtor himself and by one or more creditors in consortium. The law provides a right to the debtor to file on its own if it is unable to pay its debts. The bankruptcy process continues for twelve months.

When the case is filed by the creditors, a demand notice of 21 days is to be provided to the debtor. The debtor has two options after receiving the demand notice, first to prove in court that the claim is a disputed one or if there is a set-off or counter claim against the creditor. If the debtor is unable to prove any of the following conditions. The court will order to proceed with the bankruptcy process against the debtor.

The notice should be submitted personally by the creditor to the debtor. If the debtor is not traceable or some other problem arises then the tribunal may order that the notice be submitted by post or by some other mode as may be prescribed.

After the tribunal orders the bankruptcy process. The authority to handle the debtor’s bankruptcy procedure will be with the trustee who is an official receiver or insolvency practitioner appointed by the secretary or the person nominated by the creditors in their meeting called for such purpose.

The trustee[iv] appointed will take in its possession all the assets and property of the debtor undergoing the process. Excluding (tools, accessories or other items related to its trade). The trustee will dispose of the assets to pay the debts of creditors. In Krasner v. Dennison[v], appeal was made regarding vesting of bankruptcy’s property in the trustee. According to the provisions of the insolvency act, 1986, part IX provides that as soon as the bankruptcy process is ordered by the court. The property of bankrupt vests in the possession of trustee from the date of appointment. It even provides exclusion of some property from the income of bankrupt. The appeal was dismissed.

An individual undergoing bankruptcy must follow certain rules and regulations. The bankrupt person is not allowed to borrow financials from someone or receive credit without informing him about its bankruptcy. He/she cannot be appointed as the director of the company. He must share every information about its financials along with changes if any to the trustee and need to cooperate with him in administration of its affairs. The tribunal has got many powers relating to bankruptcy. They are- the tribunal can any time on its own motion feels that the bankrupt person has indulged into any transaction including preferential, extortionate, to favor a person or tried to reduce the value of its assets etc. the tribunal can order to cancel any such transactions.

After the enforcement of enterprise act, 2002. The bankruptcy process will not last for more than 12 months if official receiver has submitted a certificate on account of completion of investigation procedure. After the submission in court, bankrupt will be discharged from all its debts. If a bankrupt is found to be guilty of its insolvency, the court will extend some of the restrictions of bankruptcy for up to 15 years.

Procedure of bankruptcy followed in USA[vi]

In USA bankruptcy cases are filed in bankruptcy court and the procedure in such cases are governed by federal law. In USA state laws have a major role to play in bankruptcy. Here state laws are also taken into consideration to ascertain effect on the property rights of the debtors.

Features of USA bankruptcy law[vii]

In USA bankruptcy can be voluntary and involuntary both. Voluntary bankruptcy is common as the debtor apply himself for bankruptcy in this case i.e., on its own motion. Involuntary bankruptcy is rare. In this case creditors file the petition for bankruptcy. In certain cases, various corporations undergo bankruptcy involuntary basis filed by creditors so that they can enforce their rights.

After the bankruptcy procedure starts off, an estate is formed. The estate includes all the property rights and interest of the debtors at the time of commencement of procedure. If a debtor is married in certain cases some property of spouse is also covered in the estate of the debtor. Even if the spouse has not filed for bankruptcy, according to community property regimes. Other items can also be included in the estate not restricted to the property interest or other interest acquired within 180 days of commencement of case.

In the case of northern pipeline co v. marathon pipeline co, the case revolves around the fact that certain regulations of law in relation to bankruptcy judges who have a short tenure is against the constitution it was held by US supreme court. In response to which the government of US amended the constitution. After the changes made in constitution judges will be appointed for a 14-year-old term by US state court of appeals.

As in UK Law, trustee takes over the control of the administration of business of debtor. In USA law too trustee is appointed to manage the estate of the debtor. The trustee has many other duties too. The trustee can be heard in court of law in respect to any caste or proceeding. It is stated under section 307 of title 11 of USA code.

The USA bankruptcy code provides for the automatic stay of any prior proceeding pending and bars commencement of new suit. It provides protection to the debtor so that it can easily continue with the bankruptcy process and it lets its assets remain intact.

The honorable court even provides for avoidance of certain actions. It includes preferential transactions, fraudulent transfer, non-bankruptcy law creditor which is considered a strong arm and it provides the trustee to execute the same rights, which the debtor would have under the law.

The debtor has a right to claim exemption of some of its property from being included in the estate. The exemptions laws vary from state to state. It provides the debtor the right to convert some of its non-exempt assets to exempt assets according to provisions of law.

There are few examples of largest bankruptcies taken place in the history of USA. They are- Lehman brother holdings incorporation, Washington mutual, general motors, CIT group, Enron corporation.

Merits and Demerits of bankruptcy[viii]

Some of the benefits are-

• It provides relief to the debtor and creditor both.
• It involves reorganization of debts.
• Estate of the debtor is managed by independent authority by the order of the court.
• It helps in avoiding legal threats from creditors.
• In most cases, car and houses are given protection.

Along with advantages there are some disadvantages too-

• It is a lengthy, hectic procedure.
• It even disturbs the credit score.
• In some cases, it involves some post-bankruptcy procedures.

Conclusion

In the end, it is concluded that the procedure of bankruptcy is similar to some extent in various countries around the globe. Bankruptcy process aims at providing speedy and timely disposal of cases. It provides relief to both debtors and creditors. Through the process creditors can easily enforce their rights and debtors can get easily discharged from its debts.

Frequently Asked Questions

What is bankruptcy?

Bankruptcy is a process in which an individual, partnership firm, company etc. is not in that position to pay off its debts. It is an official declaration made by court of law.

What happens in bankruptcy?

In bankruptcy process, court appoints a trustee who will manage the administration of the debtor’s business from the date bankruptcy is declared. The trustee will dispose the assets to pay off the liabilities of debtor.

Who can declare bankruptcy?

Bankruptcy can be declared by either debtor on its own motion or even the creditor can even file for bankruptcy of the debtor. After hearing both the parties. Court passes final order.

What does Declaring mean?

Declaration means an official confirmation that the person aggrieved is not able to pay off its debts which he agreed to pay.

Do you lose house when you are declared bankrupt?

In cases if the debtor has no other property to dispose off its liabilities, the house can be sold but laws in some countries provide protection to house and car of the debtor.

Reference

[i] Corporatefinanceinstitute.com

[ii] Ibid

[iii] www.stepchange.org

[iv] www.gov.uk

[v] Casemine.com

[vi] www.uscourts.gov

[vii] En.m.wikipedia.org

[viii] Corporatefinanceinstitute.com