Did you know if your debt exceeds Rs 500, you can file for bankruptcy?

Yes, you read that right! Bankruptcy refers to the financial state when you become insolvent and can not repay your creditors. Introduced in May 2016, the Insolvency and Bankruptcy Code (IBC) allows creditors to file bankruptcy petitions against a debt-defaulted company.

The rules and regulations outlined in this bankruptcy act focus on the following:

• Ensuring creditors get what debtors owe them.

• Protecting the insolvent company

• Fair distribution of the company assets to its creditors..

Filing bankruptcy for a startup means the business has become insolvent. The whole process that takes place after filing bankruptcy is called insolvency resolution. This process aims to give relief to the debtor from insolvency.

Below are the steps that follow when you file bankruptcy for a startup:

1. Bankruptcy in India is filed under the Bankruptcy Protection Act. In order to initiate the insolvency resolution process, a petition can also be filed under section 9. The National Company Law Tribunal (NCLT) verifies the application for its authenticity to see if there is an actual bankruptcy case, and the request is accurately formed.

2. Once the petition is approved, the 180-day clock starts. The NCLT appoints a professional for interim resolution. At the same time, a creditors committee is selected as well. The professional makes a public declaration of insolvency within 14 days of his/her appointment.

3. After the public announcement, the professional compiles all the documents, including loans, assets, revenue, and expenses, to know the debtor’s financial status. He also takes possession of the debtor company and moves on to formulate a resolution plan. The goal of this resolution plan is to repay the debtors and revive the company, if possible.

4. When sufficient data is collected, a way to resolve the insolvency is planned. The professional presents the resolution plan to NCLT as well as the creditors’ committee at the end of 180 days.

5. The results are presented before the creditors’ committee and NCLT at the end of the resolution period. If a majority from the creditors’ committee agrees with the plan, the resolution process is passed. If the vote is negative, then the resolution attempt fails, and the company proceeds to liquidate.

Above is the sequence of events that occur when a bankruptcy petition is filed under IBC Section 9. You’ll need to be active throughout this process and make sure you’ve got the right lawyers at your side.